Pre-market numbers have been all over the place, which, at first blush, makes people assume that investors are probably scared stiff. And though that might be true of newbie investors who don’t yet see the big picture, folks who know a thing or two about the markets actually worry about a deal happening sooner rather than later.
Why aren’t investors worried about the potential freezing of the government’s allegedly “indispensable” functions like the rest of the nation?
The simple truth is that NASDAQ closed at a shocking 13-year high Oct. 1 and the major indexes were all doing pretty well. In total, the haphazard shutdown had an impact on about 800,000 government workers, with about $300 million lost each day. If this were the private sector, those 800,000 workers would soon be seen as dispensable and things would start working at a much more streamlined pace.
There’s historical precedent for a stock market boost, post-shutdown. According to Business Insider, when the government shut down in 1995-1996 the S&P 500 rose as much as 1.83 percent — and then another 10.52 percent immediately following the government’s reopening.
However, looking back on the history of shutdowns in the mid ’90s, there’s no way to compare the current era to the last — they were totally different times. Back then, employment rates were acceptable, for one thing.
Photo credit: Business Insider
What the Government Shutdown Means for Investors
Some investors thought the government shutdown might have a bigger impact. After all, back in 1996, the 21-day shutdown caused the stock market to decline by four percent.
Things are different now with 0 percent interest rates. Overall, investors are up for bearing equity risk in exchange for a percent of dividend-paying stocks — and that’s something that wasn’t on the table 20 years ago.
“Investors with a long-term horizon can significantly benefit from short-term shutdown-driven volatility to start slowly putting money to work here,” explained Otávio Dalarossa, a Los Angeles-based investor and Co-Founder of Nvestly. “While the shutdown itself has measurable impact on certain government-related sectors, value-oriented investors can find great opportunities as solid stocks go on sale,”
“If you look at the 2011 debt downgrade correction, it was a blip in the radar followed by the continuation of a bull-run that brought the S&P 500 up another 40 percent through 2013 highs,” Dalarossa added.
Of course, if the shutdown lasts longer than 21 days, the economy will generally go into a decline, much like the way a strict fast will do more harm than good if it lasts too long.
It’s unlikely that this shutdown will continue for very much longer, which means investors are up for taking the gamble. Some of the draw of investing for many people is the risk factor; the shutdown provides the perfect platform for a few thrills while potentially keeping earnings in check or even making a tidy profit.
The most famous investors are often the ones who took a big risk, such as Tim Sykes. Doing the same thing and never going against the grain rarely makes history, and this window of a shutdown could be the time for some investors to make the most of a unique situation.
What Others Are Saying About Investing During a Shutdown
The same mistakes are made time and again, and any big change at the national level — such as a shutdown — is often sufficient to scare off some investors. Unfortunately, these are often the people who can’t afford to lose their investments or are new to the game, and might be scared off investing for good.
Consider the investment-minded side effects of Sandy or even the IPO date of Facebook. Big changes, whether due to national disaster or anything involving Facebook, are opportunities that can make or break an investor.
However, it shouldn’t be seen that way. Riding out the storm and seeking those silver linings, and knowing at times when to jump ship, is the backbone of solid investment strategy. There will doubtless be things to learn from this event, as well as losers and winners in the investment field.