By Monday morning it was clear that the quixotic Congressional quest to bring the country to a screeching halt would probably succeed. The government shutdown will take effect at midnight, plunging the country into annoyance and distraction.
In general, investors can expect market volatility until the impasse is resolved.
Markets deplore uncertainty, but the good news is that the shutdown will probably be brief.
“The government shutdown is likely to happen and is likely to be short in nature. I expect that we will see a series of continuing resolutions that go out some period of time,” says Scott Wren, senior equity strategist at Wells Fargo Advisors.
Continuing resolutions basically kick the can down the road, providing funding for everything the government has to pay for while lawmakers continue to spar.
It’s unlikely that the shutdown will last long enough to impact corporate profits, but share prices will reflect the tumult. That may not be a bad thing for investors who have been waiting to get back into the market.
“Even prior to this, our work showed that we would see more volatility in the fall; my opinion has not changed, but volatility is opportunity,” Wren says.
“I’d like to see the market sell off a little more,” he says.
That’s on the assumption that the shutdown will be brief. If for some reason the shutdown goes on for a long time, there would be more disruption. Nervous investors may be somewhat soothed to know that the Securities and Exchange Commission — the regulator tasked with protecting investors and overseeing the stock market — will be standing stalwart at its post, or at least at all of its essential posts, according to an SEC memorandum released Friday.
Dent to 4th quarter GDP
Lackluster economic growth doesn’t necessarily harm corporate revenues. In the long run, short-term market volatility is a tiny blip in a really long line on a chart. But shutting down the government could be a temporary setback to the economy. The consulting group Macroeconomic Advisers posted a blog last week quantifying the impact of a shutdown on GDP.
By our measure, a two-week furlough of 36 percent of civilian workers would reduce GDP growth during the fourth quarter by 0.3 percentage point. Growth would be boosted by 0.3 percentage point in the first quarter of 2014. A protracted shutdown would cause larger, escalating disruptions, including induced declines in private production and rising risk premiums in financial markets.
Sadly, this is the minor political conflagration of the season. The debate over the debt ceiling will be more disruptive and potentially more destructive. In 2011 when Congress failed to assure the world that the U.S. would indeed pay its debts, the credit rating agency Standard and Poor’s dropped the nation’s credit rating. For three months the stock market tanked, with the S&P 500 falling 17.9 percent between July 1 and Oct. 3.
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Senior investing reporter Sheyna Steiner is a co-author of “Future Millionaires’ Guidebook,” an e-book written by Bankrate editors and reporters. It’s available at all the major e-book retailers.