Many people are afraid that the U.S. government will run out of cash come October 1st and the government will shut down. They fear that will lead to widespread chaos and stock market devastation. Should you be heading for the hills right about now in preparation for this “budgetaggedon”? No. And here are two reasons why:
1. Odds Are It Won’t Happen
Over the last two years Congress threatened a shut down more times than I changed the oil in my car. It never happened. There was talk of a government closure in August 2011, September 2011, December 2012 and March 2013. Every time, usually at the very last minute, somebody blinked and a compromise was made. The likelihood is that the same thing will happen again.
2. If It Happens, It Not Be As Bad As You Think
If the government does shut down the result may not be catastrophic. Of course I can’t predict what the future holds, but consider what happened last time the government shut down. (Yes…it happened twice before. Surprisingly, we survived and are here to tell the story.) President Clinton and Newt Gingrich went toe to toe on the budget in 1995 and neither one blinked – at least at first. The government ran out of money for 5 days in November of that year and then again for about 20 days starting December 16, 1995. During that period, some federal employees were furloughed and lots of National parks were closed. Veterans didn’t have access to full health and welfare services. Toxic waste site cleanups were stopped, federal contracts were halted and people couldn’t get passports or visas. This cost U.S. tourism and airlines big.
But think about what didn’t happen.
For the most part, hospitals didn’t close. Police stations stayed open. Firefighters kept their posts and business went on as usual. And consider what happened to the market during that time. The S&P 500 was at 584 on November 1, 1995. By January 31, 1996 the index rose to 636. That’s an increase of 8.9%.
This is no guarantee of what might happen if the government closes up shop next time. But in the unlikely event that the government does put out the “closed” signs come October 1st, a market decline is not a forgone conclusion if history is any guide. My experience tells me that the future is impossible to predict and that your investment strategy is more important than your skills at clairvoyance. And more money has been lost by investors anticipating financial calamity than has been lost from the calamity itself.
Where do you stand? Do you feel that the risk of a government closure is high? If it does happen, do you think the market will crater? Why or why not?
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