If you’re worried about how your investments will fare during a government shutdown, you shouldn’t be, at least if you’re in your portfolio for the long haul.
But that doesn’t mean that even investors who don’t invest specifically in potentially affected companies or sectors that rely on government revenue like IT, aerospace, and defense won’t feel ripple effects in the short-term. The Office of Management and Budget reported the government shutdown of 2013 slowed overall economic growth by 0.4 percent during the fourth quarter of the year.
That’s because when workers are furloughed, they aren’t buying cars, homes, or dining out. Shutdowns also hinder trade and permitting reviews of income- and job-producing projects because reviewers aren’t working. They disrupt private-sector lending to small businesses and trade deals, and impact tourism industries in regions with national parks and federal attractions.
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All of these effects and more can trickle into the financial markets and cause temporary volatility and investor uncertainty. But the key word is temporary, says Terrance McGuire, partner and portfolio manager of Dividend Growth Partners in Palos Verdes Estates, California.
And, a temporary federal government shutdown would not affect U.S. payments on Treasury bills or other federal government debt securities, such as what is found in money market and other mutual funds, according to experts at Fidelity Investments.
But there are a few other considerations investors should make to avoid unnecessary or imprudent moves during a government shutdown:
— Keep the long view.
— Assess your investments.
— Seek an advantage.
Keep the long view and avoid speculative trading. The longer a shutdown persists, the more impact it could have on the financial markets, but in recent history it’s been rather minimal, if any, overall.
Historically when a shutdown lasted more than five days, the average U.S. stock market return during the time it occurred was -0.94 percent, according to Vanguard, the investment brokerage. But average returns for the 12-month period after the shutdown were 10.77 percent.
During the two-day shutdown of January 2018, the S&P 500 index actually gained .8 percent, while during the three-day shutdown of October 1990, it was down 2.1 percent. During a lengthy 21-day shutdown in December and January 1995, the S&P 500 index was up 0.1 percent overall.
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That means investors aren’t likely to be affected unless they are speculatively day trading or trying to time the market, says Daniel Milan, managing partner of Cornerstone Financial Services in Birmingham, Michigan. “This goes against the investment philosophy of long-term strategic investing, which would not be affected by short term hiatuses, like a shutdown,” he says.
In other words: stick to your long-term plan and ignore the noise.
Assess your investments for essentiality. “Government shutdowns do not affect what are deemed essential services or contracts,” Milan says, which are what most people would be invested in, such as defense, aerospace and cloud computing.
However, a government shutdown may potentially delay approvals for loans, securities filings, and new budgets for essential contractors, all of which could cause some disruptions, McGuire adds.
“In many cases though, particularly for larger, publicly traded companies, any disruption is likely to only impact a small portion of the overall business,” he says.
Try to use a shutdown to your advantage. If a sector or company is likely to be affected, the market often anticipates it, building in the volatility of a shutdown before it could occur, McGuire says. Investors could use any temporary volatility or sell-offs as an opportunity to pick up quality stocks at a value price.
Occasionally during earnings reports, a company that may not have an “obvious direct connection” to a shutdown might report a surprise impact that results in a negative effect on its stock price, McGuire says.
“A key software deal, for example, might be held up because the approval is on hold due to the shutdown. Similarly, there might be a large tax issue a company is attempting to resolve with the government, but again, the process gets delayed,” he says.
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In companies with otherwise good long-term forecasts, such opportunities are hard to foresee, but if the issue is truly temporary, it can create a long-term buying opportunity for investors “willing to look through the near-term noise,” McGuire says.
“These situations do not occur that often, but when they do, they can potentially create a good entry point (to) a stock,” he says.
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3 Tips for Investors in a Government Shutdown originally appeared on usnews.com
