- Last week Congress passed a short-term spending measure to fund the federal government, thwarting a partial government shutdown.
- The agreement authorizes government spending through December 21, at which time the government would shut down if Congress has not reached a deal.
- Historically, the impact of shutdowns on markets has been fairly short-lived.
- Investors should focus on their strategies and not overreact to individual events in the markets.
Investors who are already facing concerns about a slowdown in earnings and rising interest rates have another risk to consider: a potential government shutdown. Congress passed a short-term spending deal through December 21 that buys more time for lawmakers and the president to negotiate a long-term agreement. However, if no deal is struck, in a few weeks legislators could find themselves facing similar options: Negotiate a long-term spending package, authorize another short-term funding solution, or shut the government down.
"Any shutdown this time around would only impact about one quarter of the federal government. Congress has already funded roughly 75% of the government through next September, including agencies overseeing defense, education, veterans affairs, and energy. A number of other agencies, including the Department of Homeland Security and Treasury, are where we could see some impact from a shutdown," says Jim Febeo, Head of Federal Government Relations.
The possibility of another round of political uncertainty coming in a few weeks may create stress for investors who are trying to understand the impact on the economy and the markets. If you have a sound financial plan, you probably don't need to take action. Instead, make sure your strategy is still in line with your goals, finances, risk tolerance, and timeline. That said, if you have not rebalanced or given your portfolio a review for some time, now may be a good time to make sure your risk level and portfolio holdings are in line with your long-term plans.
Read Viewpoints on Fidelity.com: Are you ready for a correction?
More-active investors may want to look at strategies or investments that benefit from increased volatility or use the market-moving event to revisit their holdings. Visit Viewpoints on Fidelity.com: Active Investor for details.
What a shutdown may mean for the economy and markets
What have shutdowns meant historically? From an investment perspective, a government shutdown has 2 immediate impacts. First, economically it hurts activity levels as most federal employees cannot work during the shutdown, government approvals are on hold, and other processes are held up. The federal Office of Management and Budget reported that the 2013 government shutdown was estimated to slow economic growth from by 0.4 percentage points for the fourth quarter of that year.
In addition, a shutdown can weigh on many investors psychologically, as they question the likely impact on the economy and financial markets. During recent government standoffs—the debt ceiling fight of 2011 and the 2013 shutdown—US equity volatility, as measured by the VIX (the CBOE S&P 500 Volatility Index), increased significantly.
"We've been through government shutdowns before, and while disruptive, they haven't generally had a major impact on macroeconomic trends or financial markets," says Dirk Hofschire, senior vice president on Fidelity's asset allocation research team. "It could be a negative for investor sentiment, but a shutdown by itself is not likely to be a catalyst for a major market reaction. The thing to watch would be how long the government shutdown persists: The longer it goes on, the more disruptive it will become to sentiment—business and consumer confidence. And that has the potential to replace the good news of tax cuts with the negative narrative of dysfunctional government."
Looking more deeply at those 2 recent examples of government standoffs shows how short-lived those market impacts may be. Both caused market volatility to spike temporarily, and stock prices to dip. At the same time, Treasuries rallied, as investors sought relatively conservative options. However, in both cases, within a few months volatility had dissipated, and stocks had recovered to the pre-event levels.
Hofschire notes that if a deal is eventually struck to increase government spending, that could boost economic activity, and put more pressure on the Fed to raise rates.
The bottom line
When major events happen in Washington or elsewhere, it can cause markets to become volatile. That can be stressful, but it shouldn't change your investment strategies. Reacting emotionally can make it harder to reach your goals. Here is what you should consider doing instead:
- Reevaluate your investing strategy at least annually or in the wake of any major life events, to make sure your investment mix is still in line with your goals, situation, and attitudes about investment risk.
- If your portfolio has strayed from your plan, consider rebalancing your asset mix to stay in line with your strategy.
- Review your portfolio to make sure your individual investments are still appropriate.