I find it ironic the sequel to the classic 1994 film Dumb and Dumberstarting filming at the same time the White House and Congress were leading up to a government shutdown. Many Americans could make a pretty convincing argument that it may be hard to distinguish between the two stars of the movie, Lloyd and Harry, and our fearless lawmakers. Most everyone either wants to spend our tax dollars like a kid in a candy store or hold our economy and financial markets hostage via a government shutdown and failure to raise the debt ceiling. Both sides need to take a break, take some constituent phone calls, and then get back in the back room and make a deal. This is no way to run a country and Americans are sick of it. Now that I have made the way I feel abundantly apparent, I am getting multiple questions from my clients regarding how this is going to affect the stock market and their portfolios.
Reflecting on History
The Standard & Poor’s 500 fell 3.7% during the government shutdown period that ran from mid-December 1995 to early January 1996, according to S&P Capital IQ. The good news is stocks quickly rebounded after the government got back to work, rising 10.5% in the subsequent month. This has also been in line with what the market has done in the recent past leading up to debt ceiling standoffs. So while most investors grab handfuls of hair over the actions of Washington, I also believe that any shutdown will be temporary and a failure to raise the debt ceiling will be avoided. This may lead to small declines in the stock market followed by a rebound. Previous shutdowns (’95/’96) and dismissed threats (Dec. 2012) led to large bounces. So either you plan for political armageddon or you prepare for the post-budget bounce. Not only do I know that October is historically a great month to be long stocks, but it also kicks off an equally good seasonal period for equities. (Q4 has been the best quarter to own stocks for the last 20, 50, and 100 years according to Bespoke.)
With all of this being said, there is not a “playbook” to follow with a government shutdown. The most important step an investor can take is to have an efficiently diversified portfolio reflecting your goals and risk tolerance. McNab Financial uses a “Core and Explore” strategy for client’s portfolios by using core asset classes and complimenting the core asset allocation with alternative investments to produce an efficient portfolio. So now is a good time to take a step back and ask yourself if your portfolio is set up appropriately to withstand an event like a government shutdown. If you are a client of McNab Financial, your custom portfolio is ready.