Shutdown! What Now?


By Jason Van Steenwyk

As of this writing it looks like Congressional Republicans and the Democrats in the Senate and White House are driving the government over the shutdown cliff – at least for a while. At issue, of course, is the funding for the Affordable Care Act, or Obamacare. Republicans would love to scrap the whole thing, but they know they can’t. Republicans would love to just not fund it anymore. But that’s not going to happen, either. So the GOP has carved out a couple of fallback positions – one is a delay of Obamacare until 2015 – to match the president’s unilateral delay of the employer mandate.

No dice, so far.

Additionally, the GOP House has sent poison pills toward the Senate, in a bid to force Democrats into unpopular votes. They’ve already succeeded in maneuvering Democrats into voting to uphold the “medical device” tax, which the House sought to repeal. That’s going to translate into a lot of mid-term ads attacking Democrats for voting to tax grandpa’s pacemaker and grandma’s oxygen machine. If nothing else, it will help neutralize the usual Democratic attack ads on how the Republicans want to destroy Social Security in a “war on seniors.”

The Democrats, for their part, were willing to take those ads to save the medical device tax, at least for the moment. They will take a bruising to preserve the President’s signature legacy – Obamacare – for good or for ill.

Which means a shutdown at this point is very likely.

The forecast: Feh.

This is hardly a ‘black swan’ market event: Since 1976, there have been some 17 government shutdowns. Most lasting only a few days or less. We’ve been here before, and the Republic survived just fine. The prospect of a shutdown has had a slight drag on stocks, it seems, over the past week. On Friday the Dow Jones Industrials were down for six of the last seven trading days. This was after a sharp rise when Bernanke let it be known that QE3 would continue.

Image credit: and Simon Maierhofer

In previous years, the shorter government shutdowns have been market non-events, at worst, and at best, they’ve been buying opportunities for stock investors. The longest shutdown so far was in 1995-1996. The S&P 500 actually increased slightly – during that shutdown – and rallied sharply both before and after. It did, however, bounce around within a trading range as long as the government was shut down.

Our expectation is that this government shutdown will likewise be a market non-event. The shutdown does not directly affect the long-term fundamentals of any company. And since no one has much of an advantage in predicting how Congress will act – it all gets played out before us and everyone receives breaking news from CSPAN the same way – an efficient market discounts all available information about Congressional actions immediately, so there’s not much advantage in trying to trade off this information, other than to bear this in mind:

Any big decline in equities (or anything else, for that matter) not attributable to any other news is likely a buying opportunity.

Any big increase in equities (or anything else for that matter) not attributable to any other news is likely a selling opportunity.

Markets are pretty efficient, but an alert investor willing to be a contrarian can still trade against the emotions of euphoria and despair and make money.

A better trading opportunity may be coming later this month, in gold. We’ve seen a downward correction in gold prices (and those other precious metals that follow gold prices around) over much of the past year. But the coming fight over the debt ceiling is fraught with both risk and opportunity for those who invest in gold, silver, platinum, etc.

But it’s counterintuitive, with precious metals. Gold stands to gain only if fiscal hawks cave in. If the hawks stand their ground, and extract a heavy fiscal price in exchange for approving an increase in the amount of money the government may borrow, that is good for the integrity of the dollar in the long run – though it could be traumatizing in the short run if the U.S. defaults on treasury debt.

That risk should be mentally balanced, however, against the possibility that a default on treasuries – once considered nearly unthinkable – could cause a massive disinvestment in dollar-denominated investments across the board, as markets seek a safe-haven currency.

Which is more likely?

Nobody knows.

That’s why there is risk as well as opportunity.

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