Risk Management, Trading & Portfolio Strategies

Markets yawn as the government shuts down

The U.S. government has shut down following failed negotiations between Democrats and Republicans.

The U.S. government has shut down following failed negotiations between Democrats and Republicans.

While some financial media pundits were expecting a rout Tuesday morning, markets opened rather mutedly despite the U.S. government shutting down for the first time in nearly 17 years. Should the shutdown persist, there could be problems, but for now many market participants are taking their cues from last time – including the fact that, most likely, Democrats and Republicans will reach some sort of agreement. The Dow actually opened on positive ground this morning, climbing 150 points before rising even further.

Some are scratching their heads and wondering why there is a lack of panic due to the shutdown. We'll spend today's blog post discussing a few of the potential reasons and try to look ahead for the next couple of weeks.

There have been over two dozen government closures since the 1970s, including six during the Reagan years. The last one that took place was in 1996, when House Republicans walked away from negotiations with then-President Clinton. Two separate shutdowns occurred during that period, but interestingly, markets remained calm. There was no major correction, and while some investors did indeed pull their money, it was back sooner than later. More likely than not, some people actually turned a profit.

Today is no different. Market observers know all too well that the two major political parties can't afford to keep the government shuttered forever. Eventually a deal will be cut, although the details – and the manner in which they are debated – could have a wider effect.

More dangerous is the upcoming debt-ceiling increase, which could have consequences for the U.S. financial system as Treasury bonds are an underpinning "safety" asset. A threat to this status – which in turn solidifies the U.S. dollar's reserve currency position – could cause significant uproar in the market.

For now, investors should keep a close eye on the news and use portfolio monitoring tools to make sure that they are in safe territory risk-wise. SmartStops can serve a useful purpose during volatile times because of the benefits of careful investment management.

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