Why Investors Shouldn't Panic if the Government Shuts Down
The current shenanigans likely will come down to two realistic outcomes: the GOP will give in on the Affordable Car Act more commonly known as Obamacare, keeping it mostly intact, or the government will shut down for some period of time. A third unrealistic option is Republicans successfully defund Obamacare.
The outcome more concerning to markets is a shutdown. Regardless of what you think about Obamacare (I think the economics of it are lousy), it passed several years ago and, although it is moving along slower than the President would like, the attempt to defund it at this point amounts to putting the toothpaste back in the tube.
But how scared of a shutdown should investors actually be? Is this really a doomsday scenario? Many pundits are comparing current events to the brief shutdown that occurred in late 1995 and into early 1996. For all of 1995 the S&P 500 was up 35% although it did endure a 2.5% dip, not even a correction, in early January of 1996 before going on to add another 30% in that year.
The point is not that a shutdown would be bullish for domestic equities, just that it may not be important as people think. My Street.com colleague and former boss Ken Fisher has referred to these situations as big bad scary events, and often they turn out to mean nothing and are soon forgotten. Market history is full of these examples.
Part of the buildup of anxiety is the belief that this time is different. My favorite example of this comes from the summer of 2002 when, starting in August of that year, company CEOs were going to have to sign their names to their companies' earnings. This was still in the wake of Enron and Worldcom and investors were terrified of the consequence believing that CEOs would not sign causing stocks to spiral.
The reason this is my favorite example is because I have yet to bring this up in conversation with a client or prospect who remembers this happening.