It seems like every six months the United States federal government faces a potential shutdown. The most recent instance comes on the heels of the Dow Jones Industrial Average ($DJI) setting a record high of $15,658.36 earlier in August. Currently, the market is slightly more than 200 points lower than that high and is now facing the fallout from Congress’ latest disagreement. So what does this mean for investors? Should you pull your money out in fear of a governmental collapse? Should you steer the course and take the good with the bad? Or should you buck seemingly conventional wisdom and double down on a historically high market?
If we first assume that a governmental shutdown is going to actually happen, we can look at the only occurrence of a non-essential service suspension in our federal government’s history. This occurred during a five-day stretch during November of 1995 and then again between mid-December of 1995 and early January of 1996. Its effects on the Dow were almost non-existent. Of course, this was in the midst of a steady economic climb throughout the 1990’s, not during the post-recession fragile, recovering economy we are currently sitting in.
Luckily, or perhaps not so luckily, there are a number of examples of near-governmental shutdowns in the last couple of years. There was a near standstill in the waning weeks of summer in 2011. During that span, the Dow dropped almost 2,000 points from $12,681.16 within a few weeks from the end of July to the middle of August. It edged slightly lower toward the end of September, but then steadily recovered, reaching pre-dip numbers by the middle of January 2012. The other evident example transpired when the budget sequestration wreaked havoc on the nation in the final months of 2012. During that time, the Dow again fell, this time by more than 1,000 points in a little over five weeks. However, by mid-January of 2013 it had regained its pre-sequester scare levels.
This federal shutdown scare will probably be no different, but the delicate state of the recovering United States economy is nothing to play with. If you have the money and are willing to take a risk, the latest in the stretch of national budget disputes might post a decent sell high, buy low opportunity. If our recent history is indicative of the present, a potential decline followed by a steady bounce back could occur. Another thing to consider is the fact that most experts agree that the market has been artificially inflated by the Fed's bond buying program. A change in this could cause some more serious, longer lasting problems.