Uncertainty. For anyone involved in investment management, it’s a four-letter word. That’s because uncertainty begets fear, and fear begets a host of issues that work against long-term financial wellbeing.
For advisors and investment managers alike, much of what we do revolves around removing as much uncertainty as possible from the investment experience. But sometimes the environment injects uncertainty into the equation, despite our best efforts. That’s what we’ve seen happen with the most recent government shutdown and subsequent media headlines.
To remove as much uncertainty as possible, we’ll dig into the government shutdown from a historical, objective view. Here’s what you and your clients should know:
1) The Dynamics of a Government Shutdown
A government shutdown feels extreme. However, it is important to recognize that we’ve been here before. There have been 22 government shutdowns since 1975, with an average duration of just 8 days per instance.
Those most impacted during these shutdowns are “non-essential” federal employees. These employees receive a temporary furlough, but are typically reinstated in their jobs — with full backpay — when a new funding bill is passed.
Most of the uncertainty today is derived from the broad emergency authority gained by an administration during a shutdown, coupled with rumors of plans to permanently shutter various government projects, programs, and agencies.
Layoffs (instead of furloughs) and permanent agency closures would undoubtedly impact the economy, and perhaps the markets. However, there are two key things to remember when considering this possibility.
First, emergency authority during a shutdown doesn’t supersede Congress’ control of spending and most agency funding. Long-term agency closures and staff reductions cannot be executed in a vacuum. A vote would be required.
Second, it is important to recognize that these ideas are currently speculative. We have seen no concrete proposals for permanent agency or departmental shutdowns to date.
2) The Economic Impact of a Government Shutdown
In assessing the impacts of a government shutdown, we have to remember two fundamentals — Government spending is good for the economy in the short run, as it increases GDP, but bad for the economy in the long run, as it increases the debt burden and creates a drag on future growth.
If we see a measurable reduction in government spending today, we can expect to see an associated reduction in GDP forecasts. However, we would expect the equity and long bond markets to favor this scenario due to the reduction in debt.
If history is any indicator, we expect the long-term economic impact of this government shutdown to be relatively small. Spending that is avoided today is likely to be made up for when the shutdown ends and backpay is delivered.
3) The Market Impact of a Government Shutdown
Most pressing to advisors and their clients is how a government shutdown might affect the markets, and in turn, their portfolios. A look at the history of market shutdowns sheds light on what to expect.
Looking at the week before, the week during, and the week after a government shutdown, we can see no discernible pattern in market movement. In fact, since 1976 the average gain/loss seen in the market during a government shutdown is 0.3%. The largest decline was registered during a 12-day shutdown in 1979, at -4.4%. The largest gain was registered during the 34-day shutdown of 2018/2019, at 10.3%1.
Overall, market movement before, during, and after government shutdowns appears to be driven by the broad economy, which remains relatively strong today. We have seen little reaction from the government shut down thus far, and we expect that to continue, all else being equal.
How To Address The Shutdown With Clients
The media likes to work people into a frenzy. The headlines use uncertainty to create speculation and anxiety, which leads to investors questioning their portfolios, their financial wellbeing, and their long-term investment plan.
The key to guiding clients through curves and bumps in the investment process is found in keeping them grounded. We can use the facts (i.e. history of economic and market reactions to shutdowns) to remove as much uncertainty as possible from the situation, but at the end of the day, the emphasis should be on the long-term investment plan put in place before emotions were heightened.
Every advisor discusses volatility and risk with their clients. Use this time to refresh investors on those conversations. Help investors remember that their investment plan is designed around a long-term goal. And reiterate that the portfolio is designed with that long-term goal in mind, with an allocation mix isn’t dependent upon short-term trends.
In other words, stay the course!
1Carson Group Research
The information and opinions in this report have been prepared by the investment staff of Advanced Asset Management Advisors (AAMA). This report is based upon information available to the public. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but AAMA makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute AAMA’s judgment and are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as a recommendation to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations.
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