Congress and the White House must be pretty fired up that D&D2 started filming last week. The new movie might be the only thing more comical than our elected leaders failing to negotiate and reach a budget deal. It seems that everyone in Washington wants to either spend our tax dollars or hold our economy and financial markets hostage via a government shutdown and failure to raise the debt ceiling. We need to do better as a nation.
Has this happened before?
Yes, unbelievably, we have seen this comic movie play out several times. Here are some recent examples and the following market performance:
1) In August 2011, speculation over a possible government shutdown caused the S&P 500 to tumble more than 11 percent in 3 days. The losses later evaporated as the markets reversed course; the S&P 500 rallied 25 percent in the following 12 months through August 2012.
2) In December 1995, we experienced an actual government shutdown; on that occasion, the S&P 500 rallied 21 percent in the following year.
3) In 1982, we had a one-day shutdown. The U.S. equity benchmark was up 36 percent in the 12 months after that closure. That post-shutdown gain was the biggest advance of the 12 instances.
Of course, the markets have not always enjoyed a significant rebound. The S&P 500 has declined an average of 0.59 percent during government shutdowns since 1976, according to data compiled by Bloomberg.
What about your portfolio?
We believe that we might see market swings and volatility if our seemingly intractable political leaders fail to avoid an all-but-certain shutdown. However, if in our opinion, the longer-term picture is positive, as the government will likely work through this debacle relatively quickly, as they have done in the past. We know that short-term corrections can be unsettling, but market volatility often creates attractive opportunities for disciplined investors with longer time horizons.
Here are three things to remember as we face this current crisis:
1) Be Rational in the Face of Uncertainty: We face uncertainty on a daily basis, be it today’s looming government shutdown, tomorrow’s debt ceiling crisis, Syria, a nuclear Iran or the weather. Behaving rationally under such conditions is the key to successful investing. Cashing out of the market because of a current economic or market uncertainty would be a classic irrational mistake as there will always be the next crisis to fear.
2) Remember It Is Your Portfolio: You are the driver of your life and your portfolio; hence, your life goals, growth and income needs should drive your investments. Your long-term needs are what really matters and focusing on a disciplined and systematic process to achieve those goals is the driver for successful investing rather than short-term market noise.
3) Act with Conviction: Careful analysis, experience in the market and a good understanding of the economy should be what drives your portfolio decisions. Decisions made on such a factual basis should help you keep your emotions in check and stick to your conviction even when others are engaged in panicked selling.
The ongoing political standoff in Washington does raise some uncomfortable and important questions about America’s current political credibility and reliability. However, we have faith in American capitalism, entrepreneurship and in American common sense. We believe these traits will, as they have done before, prevent our nation and our economy from falling off the cliff.
While we believe that any effect of the current fiscal showdown on the markets likely will be temporary, we understand that fear and volatile markets can be present challenges. We offer various tools and strategies that could help you climb off the Anxiety of Wealth Pyramid and get back to living the life you desire.