Don’t Blame the Government Shutdown for Stock Sell-Off, Not Directly

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What is killing the stock market is not just the government shutdown, at least not directly and not for the major part of it. Each week that the federal government is closed, it does lower GDP by amounts which have been estimated by some as 0.1% to 0.2% per week. What is truly hurting stocks is that the coming debt ceiling deadline of October 17 is now only two weeks away and it seems more and more likely that the infighting with Congress and the President is simply not going to stop in time to prevent that debt ceiling deadline from being hit. If the debt ceiling is not resolved, the implication is that a debt default by the United States moves from impossible to a new status range of possible to likely.

What we can say with solid conviction is that a U.S. Treasury debt default is not priced into the markets. What investors need to know is that a default of any sort would be temporary, but it would also be an unprecedented event. The United States is the world’s safe haven and the U.S. dollar is the world’s reserve currency. A shutdown of the government for a week or two will likely help out a handful of companies, and we showed which stocks are likely winners from it.

What will not help, and will only hurt further, is each time that Democratic senators or congressmen blame the Republicans AND vice versa. This goes for the White House too, because all this signals is simply, “We cannot work together, and we are willing to even default on our debt to prove it.”

The S&P 500 Index closed down 15.21 points at 1,678.66 on Thursday. What some may point to as trouble is that the Dow Jones Industrial Average closed down 136.66 points at 14,996.48 for the first sub-15,000 close in almost a month. Here are the treasury Note and Bond rates below:

  • 1-Year 0.095%
  • 2-Year 0.32%
  • 5-Year 1.35%
  • 10-Year 2.61%
  • 30-Year 3.71%

Sadly, this situation in Washington D.C. does not even look like it is anywhere close to being over. Stay tuned.