Government Shut Down

Government Shut Down......Or Why I Seem to Be the Only Person in the World Not Worried About This!!!!

So both the financial and regular news industry have nothing else to discuss than the government shut down today and the subsequent debt ceiling debate.  You would think from their constant braying on the subject that an asteroid was approaching earth, ready to extinguish life as we know it.  I'll tell you right now that based on what we currently know this shouldn't be a big deal for the economy.  There's one way it could be.  I'll get to that at the end of the bullet points.

Economic Debate:   American Kabuki.  A Kabuki dance is an activity or drama carried out in real life in a predictable or stylized fashion {thanks Wikipedia for the definition}.  We've seen this act before and it always ends up with the political folks who've taken away the punch bowl getting hurt.  In this case as is usual, it's the Republicans.  Look we live in a country where nearly half of us receive some type of governmental aid.  This includes everything from social security to farm subsidies as well as unemployment benefits.  You can't cut off this economic spigot too long before there's some form of blowback out in the hinterlands.  At the same time certain Republicans backed themselves into a corner with their objections to the Affordable Care Act so that it was next to impossible for them back down prior to the shut down.  Now that we've actually gone over the cliff so to speak, expect the grown-ups in both political parties to take charge and get a deal.

Wall Street is Concerned-Not!  Pundits will tell you that the markets are very concerned about this.  Stocks are down almost 3% from their highs via the S&P 500.  Except their not really down that much.   Stocks popped on September 18th when the Federal Reserve announced their "No Taper" decision.  Take that day out and stocks are down less than 2% since investors started focusing on this event and the debt ceiling.  The reason for this is that Wall Street assumes a deal is going to get done.   Stocks might be selling off anyway right now.  It's October after all which is historically not a good month for equities and stocks have been overbought to the point where some profit taking might be expected.  Underneath the hood economic conditions continue to improve.  That should be supportive of equities as long as this doesn't last too long.

The Safety Net.  The safety net for the market is that there's a lot of institutional investors-especially hedge funds that are behind their benchmarks this year.  They need a market pullback in order to make their year.  Don't be surprised to see strong institutional interest if the stocks pull back around the 5-8% level.  Most market play books assume in a year like this that stocks should behave positively in the fourth quarter.

The Caveat:  Humans Sometimes Don't Behave Rationally.  The above assumes that a deal on both the debt ceiling and budget gets done in I'll say the next two-three weeks.  It doesn't have to happen all at once but I'm basing these probabilities on all of this being out of the way by mid-October.  If for some reason these issues go longer than this, if for example the Republicans are willing to commit something close to political suicide over Obamacare {The Affordable Care Act} then all bets are off and you could see potential problems.  Probability suggests that won't happen.  Probability also suggests that stocks are a better buy on any further sell off arising from the shut down and debt ceiling debates.

*Long ETFs related to the S&P 500 in client and personal accounts.