At time of writing, parts of our government are closed and debt ceiling issue continues. Regardless of when resolution comes, I want you to remember that the effective governing of your portfolio goes on no matter what they throw at us.
“The failure in Washington is disappointing, if not a surprise. However, history tells us it is not necessarily a bad thing for investors.
The 16 government shutdowns over the past 37 years, which have ranged from one to 21 days, have not
been particularly negative for stock market investors, averaging only a 2% decline
for the S&P 500. More importantly, from a longer-term perspective, they preceded above-average returns.
The S&P 500 Index has risen 11% on average in the 12 months following the shutdowns, compared with
9% for all periods. Notably, in the last government shutdown 17 years ago in late 1995, the S&P 500 rose
21% in the subsequent 12 months.
As the government shutdown began on the morning of October 1, stocks actually rose after falling
modestly in the preceding days. That reaction makes sense, since selling stocks into short-term political
uncertainty has been costly for investors in recent years.
Of course, the shutdown is not the only issue facing investors from Washington. We are also approaching
a breach of the debt ceiling on October 17, leading to the remote-but-heightened threat of default on some
U.S. obligations if lawmakers fail to increase the limit on total U.S. federal government debt. Fear over
the threat posed by the debt ceiling seems well contained at this point. For example, the VIX, often called
the “fear gauge,” is currently around 16 and not at the 48 level seen in August 2011, when the debt ceiling
was last the subject of a battle in Washington and stocks fell 17%. Also, default concerns currently seem
minimal with the discount on the one-month T-bill at just six basis points versus 17 basis points at the
peak of fear in early August 2011. Perhaps this is because the economic and fiscal backdrop in the United
States, and especially Europe, is much improved relative to the 2011 episode.
While it is good news that the markets have been relatively steady, without a negative market reaction
there is less pressure on politicians to compromise. Furthermore, the longer the shutdown goes on and
the closer we get to the debt ceiling deadline, the more the market is forced to make politicians act. We
continue to monitor events closely and believe this is not a time for indiscriminate selling but rather a time to look for opportunities to buy on weakness.”
~Jeffrey Kleintop, CFA
Chief Market Strategist at LPL Finacial
Until next week,
Susan R. Linkous
Notes: The opinions expressed above are for general information only. Past performance is no guarantee of future results. Always seek advice before investing as the economic forecasts set forth in this letter may not develop as predicted.