The Syrian crisis has subsided and now as you know, the current “crisis of the moment” is the fight over a continuing resolution (CR) to fund the government which has led to a “government shutdown.” In the coming days the battle over whether to raise the debt ceiling will become a much larger story if not solved beforehand.
While a government shutdown might sound like a rare event, it’s not. In fact, we’ve experienced a total of 17 shutdowns since 1975 and happens when politicians cannot agree. Most previous shutdowns though, have had little impact on the market. In the 1995-1996 shutdown, the S&P 500 Index actually rose slightly.
The consequence of not adequately addressing the debt ceiling in a timely matter is an entirely different issue. Consider the last time Congress waited until the last minute to deal with this (July/August 2011), to look at the chaos that was caused in the stock market. In just thirteen trading days the S&P 500 Index dropped 16.67% from July 21, 2011 to August 8, 2011. This was then followed by almost two months of extreme volatility as the rating of the US debt quality was downgraded for the first time ever.
As always, I am watching these situations very closely and considering the negative potential they may have for my clients. I am not extremely optimistic that our government will actually solve anything. You may feel the same way. At most, I believe the government might come up with another stop-gap solution and continue to “kick the can down the road.”
I have had an ongoing concern about a repeat of the 2007-2009 stock market decline, when the market declined approximately 57%. The current overall economic picture is not much better than we saw in that period. When you invest in the stock market, you should have a plan for what you will do if things go right, and a plan for what you will do if things go wrong. Recovering from a 15% loss isn’t so hard. Recovering from a 50% loss can be extremely difficult. Do you have a plan for what you will do if things in the market go wrong from here? If the word hope is part of the plan, remember that hope is not a strategy.