Looming Debt Ceiling May Be a Greater Threat to Stocks Than Government Shutdown

By Chris L. Meacham, CPA,

Cornerstone Wealth Management

During times of uncertainty, it’s only natural for investors to feel slightly nervous when it comes to stock market performance. The latest government shutdown isn’t the first of its kind, though. Since 1980, the government has undergone eleven shutdowns with an average duration of roughly 4 days according to a

recent article

at

Yahoo!.

If we’re to look at historical data on government shutdowns, it’s safe to say that investors should have little worry when it comes to consequences on the stock market. In December 1995, the government experienced its longest shutdown of 21 days – and even then, stock market reactions were merely apathetic.

But that’s not to say the coast is entirely clear.

The Fed’s decision not to taper in September was probably mostly due to Ben Bernanke and his fear of the government shutdown. His fears, however, appeared unreasonable at the time. Most thought he would taper, but his decision-making may have been the best move given the current state of affairs in Washington, D.C.

Unfortunately, Bernanke is still probably at the mercy of Congress’s gridlock until they get their house in order. Bernanke probably won’t do anything with monetary policy until fiscal policy is straightened out.

The bigger issue is the looming debt ceiling which we’ll hit October 17. This is likely to have a greater impact on the economy than the government shutdown.

As the U.S. preps for its so-called payoff, the debt ceiling will likely cause some ripples across the stock market. A

recent article

at

CBS News

echoes these feelings as well.

“Next week's deadline on paying America's debts is the biggest threat to the economy and has turned Wall Street increasingly sour,” the article warned. “The Dow hit a high in mid-September, but since then, it has fallen 900 points. It dropped nearly 160 Tuesday after hearing House Speaker John Boehner and President Obama, closing at 14,776.”

The government will have to address its $12 billion dollar debt in Social Security payments plus $6 billion in interest payments. Whether the government comes through can be anyone’s guess at this point. It’s this precise uncertainty that can cause effects on the stock market.

For investment purposes, investors can take a proactive approach during this time of uncertainty. We believe in diversification across asset classes and managers, but also diversification against risks. It’s essential that clients review their portfolios to make sure they don’t have too much risk if certain events happen. Clients want to have protection against a variety of risks including but not limited to inflation, deflation, recession, geopolitics, rising interest rates, government gridlock or other factors that may affect stock market performance.

Investors are urged to stay proactive, diversify and talk to us to better understand the strengths and weaknesses of their investment portfolio.

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