It seems incredible to believe that a disagreement in US Congress can cause a complete shutdown of (non-essential) government services. But it has happened. And it doesn’t look like it’s going to end quickly.
The current situation is due to negotiations over Obama’s healthcare reforms, which are being tied to the “Continuing Resolution” which Congress needs to pass to be able to fund government. Much of the debate revolves around parts of “ObamaCare”, which have already been passed.
Market impact
The impact on the markets has been pretty minimal so far, in both the US and Australia, although President Obama has suggested that Wall Street should be more concerned this time than in previous shutdowns.
The Switzer Super Report founder, Peter Switzer, reminds us that these things eventually get sorted out.
“After the previous shutdown in 1995-96, the stock market roared up 600 points in three months following,” he says.
“That could be more than what I expect after this one, because the US economy was a lot stronger then, but I do expect a solid market rise December to March next year.”
Charlie Aitken, Switzer expert and managing director of Bell Potter wholesale, says it’s: “political theatre that in an odd way further forces the Fed to stay the course in QE.”
“Perhaps this was the reason the Fed didn’t taper in September. In terms of direct relevance to Australian equities, I see none.”
Buying opportunity
Chief economist at CommSec, Craig James, says that investors should probably sit on the sidelines and watch for opportunities and Aitken agrees.
“In fact, I see any hesitation in Australian equities due to the US government shutdown as a buying opportunity,” Aitken says.
Switzer Super Report expert and CIO Paul Rickard is watching the markets too and notes that they haven’t reacted that much yet.
“So the risk must be that the ‘common sense’ takes a lot longer or is more difficult to achieve – so the market sells off,” he says.
“I am a buyer in dips – I don’t think we have seen much reaction yet and personally, I’m holding off.”
How long?
No one really knows how long the standoff might go on for.
“It’s hard to determine but I think the Republicans are under pressure to give in as the popularity polls show that they are being blamed for this stand-off,” Switzer says.
And Rickard says: “It’s impossible to call from Australia – like everyone else, you expect that “common sense” will prevail and the impasse will end.”
With the Republicans seemingly unwilling to negotiate, Craig James predicts that this could be one of the longer ones.
The last time there was a shutdown during Clinton’s administration in 1995 and 1996 for a total of 28 days, it was estimated to have cost the government over $US1 billion, with a similar length shutdown now estimated to cost twice as much.
The debt ceiling
This impasse is separate to the debt ceiling debate that will also come up for negotiations again in just two weeks’ time.
“This is the bigger worry as the last time this happened, stocks slumped massively, though we were still in the grip of the GFC,” Switzer says.
“Once again the Republicans would be mad not to find a solution to this debt ceiling issue but they only have until October 17. The US motto is ‘In God We Trust’ but considering the craziness of the Congress, these guys could even be a challenge for the big fella above!”
CommSec economist Craig James is hopeful that once these Continuing Resolution negotiations are sorted out, and the government is back in business, that the debt ceiling talks could be less acrimonious.
“I suppose we are a little bit more hopeful in terms of the debt ceiling,” he says. “Both sides [of politics] don’t want that one to be affected by the current wrangling.”
Let’s all hope he’s right.
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Also in the Switzer Super Report:
- Paul Rickard: Switzer portfolios outperform again [1]
- Charlie Aitken: Buy Westpac before the result [2]
- Ron Bewley: The outperformers in a small IT sector [3]
- Penny Pryor: Buy, Sell, Hold – what the brokers say [4]
- Tony Negline: Family trusts versus SMSFs [5]
- Peter Switzer and Noel Whittaker: Question of the week [6]