As I write, our government has begun a partial shutdown – the first in 17 years. In case you missed the video e-mail I recently sent, rest assured the shutdown should not have a major impact on the markets. With any luck, it will be resolved by the time you read this.
Wall Street expects the duration to be only a few days. If not, the Fed is on standby with more quantitative easing (QE). In the past 30 years, the government has shutdown 10 times. And according to a recent Bloomberg report, the S&P 500 rallied an average of 11% in the 12 months succeeding past government shutdowns since 1976.
What does this mean for you and your money? If the shutdown is short-term, it should have no significant long-term effect on returns or the economy. If it lasts a few weeks, expect a negative reaction from the markets. However, once the shutdown is over, the markets should quickly turn around.
As we head into autumn, the Fed has pledged to continue the QE and the bond purchase programs. This most likely will last until the end of January, if not later. In the meantime, it’s widely expected the markets will continue to do well. Bonds, which have performed poorly in the past few months, should also benefit.
Historically, October hasn’t always been friendly to investors. At the present, the markets are flirting near all-time highs, and the possibility always exists for a short term correction.
Markets are cyclical – just like the seasons, a heart rate, or even the engine in your car. It’s important to stay within your risk tolerance and ride through the cycles. Let asset allocation, diversification and the low volatility criteria work.
Keep in mind, a market correction also creates opportunities for those looking to increase their level of risk. Conversely, if you feel the downside of risk is too much, now would be a good time to review your risk tolerance and alternative options.