Investment News from Sumner Wealth Mangement October Newsletter


Wealth Management Newsletter

U.S. Government Shutdown                              What is the impact on Wall Street?


October 2, 2013



Dear Visitor,

Effective 12:01 a.m. Monday morning, the federal government has shutdown. Financial markets have not experienced a shutdown since 1995, so it understandable that many individuals may be anxious. This certainly is not an unprecedented occurrence, as there have been 17 previous shutdowns since the mid-1970's when the current budget process began. Analysis of the historical data surrounding these shutdowns reveals that each had a unique impact on market returns, due in part to the fact that each shutdown resulted from exclusive sets of circumstances.



Historical Perspective


When aggregated, the 17 shutdowns lasted a median of two market days. Only six of the shutdowns lasted more than five trading days, which resulted in a median S&P 500 loss of 1.7 percent. As to be expected, on average, the S&P 500 has experienced modest dips before, during, and immediately following shutdowns. It is also important to note that in all but five instances, markets had rebounded by the 10th day after the government returned to work. If the current shutdown lasts longer than a week, the expectation is that fourth quarter economic growth will deteriorate but not enough to push the economy into recession.



Debt Ceiling of Greater Importance 


The shutdown undoubtedly influences the markets; however, of greater importance would be the failure of Congress to raise the debt ceiling. Currently there is no precedent for a default of the U.S. government. However, if the August 2011 struggle over the debt ceiling can serve as an indicator, when the S&P 500 plunged 16.8 percent between July 22 and August 8, a default would dismantle the thought of Treasuries as risk-free assets and stocks would most certainly suffer.  


For now, markets have consolidated sideways for a few weeks ahead of this political theater. Volatility may increase into October as the debt ceiling discussion intensifies. In investors' minds, the failure to avert a shutdown probably increases the likelihood of Washington unsuccessfully raising the debt ceiling, which would be problematic for markets.   



Today and Into the Future


Investor sentiment was near levels of excessive optimism, but has since pulled back in the midst of the S&P 500's longest losing streak of the year. A portion of the streak is attributable to uncertainty in Washington, which may be further enhanced by the potential delay this week of economic data such as Friday's jobs report.

It is very easy to become emotional and want to raise cash in front of these unknowable events. We remain steadfast in our diversified approach to constructing portfolios, focusing on the long-term and overweighting areas that present valuation opportunities. It is also important to remember that we have further diversified portfolios by including alternative funds which are designed to help offset traditional stock and bond market risks. Rest assured that we will continue to be watchful of economic and political events and their subsequent influences on financial markets.



Mark Sumner                                                                         


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