Investing During the Government Shutdown and Debt Limit Debate

Investing

Contributed by Symmetry Partners

As you are aware, the U.S. government shutdown took effect on October 1 after Congress failed to come to terms on a bill to keep the government funded. While potentially unsettling to many, the government shutdown is not without precedent.  We have, in fact, experienced shutdowns before, with the last coming in 1995 and 1996.

As you may have read, about 800,000 of the government’s 2.9 million employees are being furloughed as a result of the shutdown. Some of the agencies affected include the SEC, CFTC, and EPA³ as well as national parks, museums, and monuments. While you may certainly feel an unwelcome impact, this will likely prove to be more of a nuisance than a real problem for the majority of Americans. Many economists believe a short-lived shutdown is not likely to have a major impact on the economy, although Goldman Sachs estimates a three-week shutdown will erase 0.9% from fourth quarter GDP.[1]

Though the partial shutdown will have some effect on the economy, we believe the real issue is the upcoming debt limit, which we are set to hit around mid-October. Unlike the shutdown, which affects discretionary spending, failing to raise the debt ceiling would likely result in deeper cuts. The ceiling was technically hit in May, but the government was able to institute emergency measures to delay certain payments that have allowed operations to keep running. The government has raised the debt limit 42 times since 1980, and it has usually been met with minimal resistance.[2]

Should our government actually fail to raise the debt limit in a timely manner, we would face the possibility of a default on U.S. government debt. Though the likelihood of default is remote, ongoing dysfunction and rising debt may adversely impact U.S. credit in the future. U.S. debt has historically held the equivalent of AAA rating with the three major rating agencies, although Standard & Poor’s downgraded U.S. sovereign debt to AA+ in August, 2011. Unfortunately, a lack of compromise may lead to additional downgrades.

It is important to recognize that market volatility may be a result of these proceedings, but that such volatility does not mean that the appropriate course of action is to divest from the market. We do not recommend changes to one’s strategy or allocations based on political events. We have seen government conflicts in the past, and we will see more in the future. We believe that investors should remain invested through market ups and downs in order to reap the long-term benefits of higher potential returns.

 

Symmetry Partners, LLC is an investment advisory firm registered with the Securities and Exchange Commission. As with any investment strategy, there is a possibility of profit as well as loss. All information is from sources believed to be reliable but cannot be guaranteed or warranted. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.

 


[1] “US begins government shutdown as budget deadline passes.” BBC. October 1, 2013.

[2] Tobey, Pam and Darla Cameron. “Which presidents raised the debt ceiling.” The Washington Post. September 24, 2013.

³Securities and Exchange Commission (SEC)

U.S. Commodity Futures Trading Commission (CFTC)

Environmental Protection Agency (EPA)

 

Photo Credit: Government Building by Shutterstock