Yesterday was the start of a new fiscal year for the U.S. federal government, but failure to agree on a spending plan in time for that deadline left federal coffers short. As a result, a partial government shutdown took effect. It’s important to emphasize that this was a partial government shutdown. Many services remain operational, such as our active military, Medicare/Medicaid, Social Security and airline travel.
What Should Investors Know?
The shutdown may prevent the release of economic statistics in the coming days and this does present an inconvenience. However, the markets yesterday were relatively calm. Equities were flat, to slightly up; bonds were selling off and the dollar seemed to be weaker. But there was no appreciable market movement and it was one of the quietest trading days we’ve had in credit /fixed income for some time. Of course, the longer the shutdown lasts, the more anxious the markets will get.
We expect that this impasse will be resolved one way or another and that the shutdown will be short-term in nature. However, it is not yet clear what the resolutions will be, so it’s difficult to gauge the actual length of the shutdown. That being said, we don’t expect a meaningful disruption in the markets that would cause great concern to investors.
What about the Debt Ceiling Deadline?
We suspect that if the shutdown approaches the October 17 debt ceiling deadline, the deadline itself will be extended – due, ironically, to the effects of lowered spending during the shutdown. The markets so far are not reacting in a way that indicates a long-duration shutdown.
Tuning Out the Noise
In our view, investors should stay focused on the economic data and investment fundamentals and maintain their investment thesis, despite the shutdown. Economic data continues to improve, which bodes well longer-term for equities. Even with improving economic data, but especially in light of the shutdown and the looming debt ceiling deadline, we don’t anticipate tapering to be back on the agenda much before year-end.