April 28th, 2023
Is a Government Shutdown Imminent?
A debate is brewing in Congress about whether to approve President Biden’s request to raise the $31.4 trillion debt ceiling. If not resolved, the issue could cause a shutdown of government services beginning as early as July.
With this issue possibly dominating the news next month, I thought I would address it here, before you begin to worry about this.
The current debt ceiling was reached in January, and the government has been running since then on a series of loopholes in the law. The Biden administration wants the debt ceiling raised to accommodate the deficit spending in its latest budget proposal. Government deficits have to be covered by borrowing through the sale of Treasury bonds. The Republican-controlled Congress wants certain spending cuts before they will allow the debt ceiling to be increased. If they can’t agree on this legislation, the federal government will be forced to shut down because it cannot pay its costs of operation.
According to the Congressional Research Service, the debt limit has been raised or suspended 61 times since 1978.* Government shutdowns have occurred 20 times in the past 50 years, an average of one every 2.5 years, so government shutdowns are nothing new. Most are centered on lifting the debt ceiling, so our government can continue writing checks without them bouncing.
Shutdown threats are always accompanied by verbal gasoline being thrown onto political fires, including: (1) Social Security won’t be able to send out checks, but they always do. (2) The government will default on its debt, but they never do. (3) The stock market will go into the tank, but it really doesn’t, and on and on.
In fact, I recently ran across some research presented by Sam Stoval, an analyst at CFRA and S&P Global. The past 20 government shutdowns have averaged 7.5 days in length, with the longest being 21 days. During most shutdowns, non-essential government services (like national parks) will close, but essential services such as military and those folks running the Social Security payment processes continue working with the promise of back pay to come.
So, government shutdowns are much more about political theater than an interruption in your life. You can vote and the folks playing political chicken in Congress understand that.
As far as the stock markets are concerned, the average drop in the S&P 500 Index** the week prior to a government shutdown has been -.4%, well within the stock market’s normal range for a week.
The day of a shutdown, the S&P 500 has shown an average gain of .1%. The largest loss on shutdown day was December 22, 2018 with a -2.7% posting. However, the day of the 1987 shutdown, shortly after Black Monday, the S&P 500 posted a 2.5% gain. Go figure. Only 4 of the 20 shutdown days have moved the S&P 500 index up or down by more than 1%.
The total stock market change over the course of the past 20 shutdowns averaged a .1% gain.
It appears that the stock market has pretty much considered government shutdowns to be yawners. Knowing this, I hope you can quit worrying and also consider it a non-event.
Besides, if the market starts to move, with your Shadowridge trading team monitoring every investment we hold for you, every day, we are confident that we will quickly recognize what is happening and take whatever moves are appropriate for your strategy.
So, in the words of that great British philosopher, Mick Jagger, “We gotchu.”
If you have friends who worry about this or any other aspect of the economy that may affect their investments, please have them call us at 888-434-1427 to schedule a portfolio review to see if our style of proactive investment management is right for them. Another simple, helpful way to introduce someone to our services is to forward them this newsletter. We appreciate your business!
*Votes on Measures to Adjust the Statutory Debt Limit, 1978 to Present, Congressional Research Service, updated January 6, 2022 (https://crsreports.congress.gov/product/pdf/R/R41814)
** The S&P 500 is an index of 500 stocks considered representative of the US stock market.
Data is historical. Past performance is not a guarantee of future results.
*** The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
**** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
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In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Shadowridge Asset Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Shadowridge Asset Management, LLC, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
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