Risk Management, Trading & Portfolio Strategies

Could a government shutdown hurt the stock market?

Could the stock market fall if the government shuts down? The simple answer is maybe.

Could the stock market fall if the government shuts down? The simple answer is maybe.

It's easy to turn to history for answers to some of the more difficult problems we explore here on the SmartStops blog, but the question of whether or not a potential U.S. governmental shutdown could adversely impact the stock market is complex. Perception is a powerful instigator for action, and such an event would no doubt shift some investor sentiments regarding the United States and its economy in a bad direction. Yet it's not at all clear that a government shutdown could significantly affect markets, although there are some historical markers to point to.

During the 2011 debt ceiling debate, which nearly ended with a default, U.S. stocks swooned on the news. However, it's key to note that this was more of a knee-jerk reaction and that, at the same time, many observers knew that Washington would cobble together a deal. But the failure of the Congressional "super-committee" to draft a deal on the budget and debt left a bad taste in both of the major political parties, although the finalized bargain gave them the better part of two years to find a way to work together.

The nation is once again on the brink, but the stakes seem to be higher. Congress is also debating an increase to the debt ceiling, which is expected to be breached sometime in October. Extraordinary measures from the Treasury Department are expected to keep the country's borrowing authority in the black until early November, at which time a technical or selective default could take place.

This context is necessary to understand what impact this particular crisis could have on the stocks. The last time the government shut down, in 1995-96, stock markets were still in high-gear during the so-called Clinton Boom. Investors felt that it was safer to hang onto their assets than to cash out in fear of political and economic calamity. While there was certainly pressure, the fact remains that few, if any, investors lost that much money the last time House Republicans shuttered the doors on the federal government.

Is this time different? One could argue that it is indeed a whole new beast that investors have to contend with. A failure to keep the government open will no doubt call into question lawmakers' abilities to hammer out a workable debt-ceiling bill. If that proposal fails, markets could indeed suffer from a credit shortfall or a lack of quality collateral in the form of Treasury bonds.

Investors need to take care of themselves and their portfolios. SmartStops are effective investment risk management tools that are simple to use and make perfect sense in a volatile environment. Explore our website today to learn more!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s