How the Government Shutdown Will Affect You and Your Wealth

The U.S. government shutdown, which began at midnight today, is causing consternation for investors both here and abroad. What are the ramifications? What does this mean for the debt-ceiling showdown later this month? Is this a sign of a larger political breakdown ahead? Money and Markets’ investment editors answer those questions and more, with surprising results.

Larry Edelson: Most players expected the government shutdown to be bullish for gold. But as I’ve been saying all along recently, a government shutdown is precisely the opposite: bearish for precious metals. Why?

Because cash is king when a government shuts down. Not gold. As a result, gold is down over $34 today, silver is down more than $0.76, or 3.6 percent. Both are now sending additional sell signals on my systems. Also as I’ve said all along, the bottom is not yet in place for precious metals.

Though the shutdown won’t last long, I think its significance will ultimately lie in the fact that it takes us all just one step closer to the day when Washington will have to finally give up the ghost, and downsize dramatically. As the government shrinks, the private sector will expand to fill the void. That’s extremely bullish for almost all markets.

Doug Davenport: Monday night marked the end of the U.S. fiscal year, and without an agreement on a “continuing resolution” (CR), the government shut down at midnight.

Following that comes the much more important debt-ceiling debate to prevent a U.S. Treasury default on Oct. 17.

Since 1970 there have been 17 shutdowns, and guess what? We have survived every single one of them. Interestingly, the stock market has historically done worse the day and week after the shutdown than it did leading up to the event.

Moreover, in 11 of those 17 instances, the S&P 500 was higher one month later by an average of 0.7 percent.

The way Washington works is all about political interest and political survival.

As Sen. John McCain told the New York Times last week: “We will end up not shutting down the government, not defaulting and not defunding Obamacare. I’ve seen how this movie ends, but I don’t know all the scenes.”

The stock market’s attention should revert to the improving economy, gasoline prices at their lowest level since January, improving earnings, better economic numbers out of China — you get the idea.

Bill Hall: This is a non-event, and the market has already shrugged it off. It will get resolved over the next week or so.

The upcoming fight over the debt ceiling is no big deal either.

The big deal is if Ben Bernanke’s successor at the Fed turns hawkish (which is currently unlikely because it’s expected to be Janet Yellin). Or if a big bank in Europe unexpectedly blows up.

Watch the Fed and watch the succession process. All that matters is the Fed. Everything else is noise.

The Dow will be in a trading range of 14,500 to 15,500 until we know what is going to happen at the Fed.

J.R. Crooks: The government is officially shut down. And the world has not ended. The stock market has not collapsed. The U.S. dollar and Treasuries, however, are feeling some pressure.

Anyone who cares enough to pay even minimal attention realizes this “shutdown” is less about keeping the economy running and more about ideology. That’s why I think attention will quickly turn to the debt ceiling. To wit, I presume the ability to fund the Treasury has more direct influence on markets and investor sentiment.

Between now and then, I imagine the stock market (risk appetite) could be supported as the shutdown rhetoric subsides and recent downside is retraced. Looking back, the one-year period following previous government shutdowns has been kind to the markets. But if the debt-ceiling discussion is as polarized as the shutdown discussion, then markets could quickly and easily run into some trouble. If recent history is any guide — a la the 2011 debt-ceiling faceoff — the market could suffer a sudden beating.

Charles Goyette: Today’s government shutdown marks the beginning of the federal government’s fiscal 2014. Realists know that the elected classes are indifferent to questions of economic prudence or recklessness. They care only about strategies that promise electoral advantage. So who wins and who loses this spending face-off? Answer: The American people lose.

What must not be missed in today’s shutdown theatrics and the coming debt-ceiling debate is that when this new fiscal year is old, both government spending and government debt will be much larger. And that means eventually there will be a much more destructive government shutdown — only it will be a real one driven by a collision with economic reality.

Mike Larson: So at 12:01 a.m., the federal government shut down. And what did the bond market do? It fell! Both short-term and long-term Treasury prices declined, and yields rose. I see two reasons why …

First, the economic data have simply not been that bad. Jobless claims are running at levels they last saw in 2006-2007 … when 10-year note yields were almost double their current levels. The world outside of the Washington bubble is moving right along, and unless the economic data crater soon, there’s no reason for yields to head lower.

Second, foreign holders of our debt are disgusted with the shenanigans in D.C. So they’re selling the dollar and selling U.S. bonds. That’s likely to continue as we get closer and closer to the debt-ceiling deadline later this month. That crisis could be the “main course” for bond investors, compared with the government shutdown “appetizer” they’re trying to stomach now.

Tom Essaye: It’s a sad day when I have to write about dueling political crises in Washington and Italy, and admit it’s probably likely that Italian politicians will find a way to work together to avoid a crisis before our own politicians will.

In the U.S., as you now know, the government started shutting down at midnight. The important question here is “how long?” The general expectation is around five days. If it goes beyond a week with little progress, expect political gridlock to start to weigh on risk assets. For now, though, it’s almost a relief we’re behind the gamesmanship and can hopefully start to work on a real solution.

All things considered, the market was resilient yesterday. While month-/quarter-end positions may have had something to do with it, as I’ve been saying, this political drama isn’t a rally-killer unless the current expectation of a short-term shutdown is materially altered. So far that hasn’t happened, but it’s important to realize that a government shutdown — as long as it’s temporary and potentially ushers in a debt-ceiling deal — could be a preferable solution to having this fight with a debt-ceiling deadline looming. Point being, if we shut down for a few days but get a bigger debt-ceiling deal done, it’s a lot better than getting a short-term resolution and then having a big fight over the debt ceiling, where there is no wiggle room.

Keep an eye on a repeal of the medical-device tax. That’s a potential point of agreement that might usher in a bigger compromise on the Affordable Care Act and the budget.

Mike Burnick: Considering how utterly dysfunctional our government has become, a Washington shutdown may not be such a bad thing. Despite some market turbulence due to the fiscal fight and upcoming debt-ceiling drama, this may be a buying opportunity for investors.

Since 1976, the U.S. has experienced 12 shutdowns of various durations. The S&P 500 has gained 11 percent, on average, in the 12 months after a shutdown, compared with an average advance of 9 percent in all other periods, according to Bloomberg.

Don Lucek: I view the so-called shutdown as an opportunity. Lately, the equity markets have seemed far more driven by Fed action (or inaction) than by more relevant drivers — such as the broad erosion in company earnings guidance we received during second-quarter earnings season. That tells me the market views political nonsense as no more than a sideshow.

I think the market has been coming to terms with the erosion in earnings expectations (i.e., acting rationally), and we need to take a bit of a longer view than the next month. I’m looking for a bottoming in guidance and expectations erosion in the upcoming reporting season. I’d look at any further pullbacks (perhaps because of the FOMC minutes next week) as opportunities to add to positions that will benefit once global economic growth steadies and ultimately accelerates.

Best wishes,

The Money and Markets Team