By ALAN KONDO
You may be concerned about the current government shutdown and its impact on the market and your investment accounts. After nearly three weeks into the shutdown, many people are becoming more nervous. Until a resolution is reached, all government functions considered non-essential have been suspended. The Republican condition for ending the shutdown has been to defund or delay the Affordable Care Act.
Some Republicans believe this is their last chance to stop Obamacare, which is now law. When Social Security and Medicare were first introduced they faced similar resistance. Nevertheless, once these entitlements were in place they became politically difficult to remove.
Both parties are loudly blaming each other. If polls clearly showed that one side was taking the blame, that party might be motivated to back down. However, many people have concluded that Republicans and Democrats are both at fault, increasing the chance that the dispute could stretch on.
History tells us that the current stalemate is probably no reason to panic. Government shutdowns are hardly rare – they have occurred 18 times since 1976. The Standard and Poors 500 index declined only one-half percent during previous shutdowns, and rose an average of eleven percent in the 12 months following resumptions.¹
Also worrisome is the possibility that the government shutdown will remain unresolved by the time the government reaches its debt ceiling around Oct. 17. The debt ceiling has been raised 74 times since March 1962 and has typically been an uncomplicated, non-political procedure. This time around, Republicans have indicated that they will require the same Obamacare-defunding conditions for approval.
The clash will probably create a lot of drama but will not necessarily have lasting negative consequences for the market. The last time government debt default was a possibility in August 2011, stocks fell 11% (much less for diversified accounts). Since then, however, stocks have climbed 44%.¹
Although the impasse in Congress is reason for concern, the overall economic indicators are very positive – we have the best housing starts in six years, unemployment has fallen below 7.5%, corporations are making record profits and the market has been on a tear. Even a robust market does not go up in a straight line and will experience bumps in the road. If there were no risk, the market would not generate such good returns. A long-term outlook using a globally-diversified strategy is one of the best ways to capture those returns.
¹ www.bloomberg.com/news/2013-10-01
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The opinions expressed above are solely those of Kondo Wealth Advisors, LLC, a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, LLC nor its representatives provide legal, tax or accounting advice.