Shut Down: One Week and Counting

As a very successful third quarter in the financial markets drew to a close last week, politics reared its ugly head once again. The federal government “shut down” October 1 after our friends in Washington failed to agree on a resolution to extend government funding into the new fiscal year. Up next? The potentially more serious debt ceiling, which is expected to be reached on October 17.

The immediate reaction was a lot of frustration with the dysfunctional group in Washington but general agreement that the partial shutdown itself was not a cause for panic. Essential services continue. The market took it in stride on day one, with the S&P 500 actually gaining .80%, and then giving back about 1% over the next two days. This is not out of line with what we have seen during government shutdowns in the past. There have been 17 occasions in total before this one, the most recent in 1995-1996. On average, the S&P 500 has fallen .3% during the shutdowns and gained back .9% in the 10 days following1.

government shutdown

One of my colleagues was in Washington, DC last week and noted that the most visible impact in the capital seemed to be the inability of visitors to tour the monuments. Not facetious or insensitive, just indicative of the level of pain most people (aside from furloughed workers) have felt so far.

It was easy to overlook a really strong third quarter amidst the government drama. The S&P 500 was up 5.2%, small cap stocks almost double that. International stocks shot up as well, 11.6% in developed markets, and 5.8% in emerging. That brings the S&P 500’s return to +19.8% for the first three quarters of 20132. Bonds even eked out gains for the quarter as taper talk waned. It is likely that given the stories on the evening news, most people are unaware of the strong market performance. And it is a good reminder that economic news is not always market news. Market prices likely already reflected the notion that there is risk in the fiscal policy.

Trying to adjust one’s long term investment plans to the ebb and flow of national and world events seems appropriate in theory but is extraordinarily difficult (even futile) in practice. The context of the last five years provides an excellent case in point. Five years ago Lehman Brothers collapsed and the government was forced to bail out the banking system. In the interim, many things have occurred that would give any investor pause: a $700 billion fiscal stimulus, unprecedented intervention by the Federal Reserve, a European debt crisis, a massive earthquake and tsunami in Japan, the revolutions in many Arab states, stubbornly high unemployment, the 2011 political fights over spending and tax policy as well the divisive elections of 2008, 2010, and 2012. Yet, in spite of it all, the NASDAQ stock index (which represents the innovation economy) just on Tuesday closed 200% above the low hit in March 2009. The broader S&P 500 is up 174% since its low the same month3.

This is not to downplay the really serious problems we have with a government that has become highly ineffectual and the potentially devastating impact if these fiscal issues aren’t resolved. The longer the shutdown goes on, the larger the likely effect on GDP. The impending breach of the debt ceiling raises concerns over default and downgrade and more serious economic consequences.

And the market doesn’t like uncertainty. As Washington’s failure to act is prolonged, we may see continued and even greater volatility in the markets, especially if lawmakers take us to the brink on extending the borrowing limit.

It’s easy to get caught up in the nightly news and think we have to do something. While this may feel good emotionally, it usually comes at the expense of derailing your long-term portfolio. Our view, and our counsel to clients, is to never let short-term volatility get in the way of your well-crafted long-term plans. That was, sadly, a hard-learned lesson for investors who pulled out of the market in early 2009. Don’t let fear or other emotions play a role in your investment decision-making. Easy to say, but harder to do. That’s why you have an advisor.


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Shut Down: One Week and Counting

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