How to Handle the Government Shutdown as an Investor
NEW YORK ( MainStreet) Investors should avoid reacting to the first government shutdown in 17 years by selling off their equity holdings, investment advisors said.
Instead, some investment experts recommend that investors ramp up their holdings and take advantage of any dips in the market by adding equities and gold to their portfolio.
The current government shutdown should not be viewed as a threat to the financial markets, said Bill Peattie, founder of Peattie Capital Management and a portfolio manager on Covestor, a registered investment advisory.
The market will perform well over the long term as the economy rebounds, he said.
"Longer term, even with the onset of tapering sometime in the next three to 12 months, there is still enormous liquidity in the system and reasonable valuations in a number of parts of the market," he said. "On balance, global economies are improving, albeit slowly and sporadically."
The stock and bond markets have reacted positively overall to the past 17 shutdowns since the current budget process started in the 1970s, said Bill Stone, chief investment strategist of PNC Wealth Management.
Since it is unlikely for the shutdown to occur for longer than a brief period, investors should expect only to experience "short-term volatility" in the market, he said.
"We do not expect long-term market or economic damage," Stone said. "Over the longer term, markets have been rather unflappable in response to government shutdowns. However, in our opinion, a government shutdown may lead to a more contentious fight on the debt limit, which could cause some volatility as the projected October 17 debt limit date approaches."
The S&P 500 on average experienced "only modest downward pressure before, during and immediately after the past 17 shutdowns," he said. The S&P 500 declined 0.2% during shutdowns and usually rebounded within 10 days after the government shutdown ended.
Over the 1995-96 two-period impasse, the S&P 500 was up 4.0%, Stone added. During the six shutdowns that lasted more than five trading days, the S&P 500 fell a median of 2.0%.
"We believe this is not a time or a reason for investors to move to the sidelines," he said.
Investors should examine their portfolios and add more equities to the mix while prices are cheaper, said Peter Cohan, adjunct lecturer at Babson College and president of Peter S. Cohan & Associates, a management consulting and venture capital firm.
"Now is a good time to buy stocks," he said. "Nervousness related to the government shutdown may drive down prices making them less expensive. In the last four years, stocks have risen an average of 22%. Over the last 200 years, they average about 7%."
Stocks are a better asset class for an investment since gold's volatility is often hard to explain while bonds "are a poor investment because the Fed is likely to raise interest rates next year, which will make their prices fall," Cohan said.