What happens if the government shuts down this week?
Well with all the defunction in Washington now a days, it is not that surprising that we have reached this point. The reality is that it may be good for the shutdown to happen. It would force both sides to come to an agreement to cut some spending from our budget and reduce the amount of borrowing the government does to fund their yearly operations. They currently borrow about 23% of the budget, that is crazy! Could you imagine putting 23% of your household budget on a credit card each month?
If a shutdown would happen, I wanted to layout out what you could expect to see in the financial markets.
Stock Market Volatility
One of the most immediate effects of a government shutdown is increased stock market volatility. Uncertainty about the government’s ability to fund its operations can lead to a drop in investor confidence, causing stock prices to fluctuate wildly. Investors often become more risk-averse during a shutdown, which can lead to selling pressure, especially in sectors heavily reliant on government contracts, like defense or healthcare.
If you’re invested in the stock market, it’s essential to brace yourself for potential swings in your portfolio’s value. Consider reviewing your investment strategy to ensure it aligns with your long-term financial goals and risk tolerance. If you’re nearing retirement or have a low-risk tolerance, it might be wise to reallocate your assets to a more conservative mix.
Impact on Government Bonds
Government shutdowns can also impact the bond market, particularly U.S. Treasury bonds. Treasury bonds are considered some of the safest investments because they are backed by the full faith and credit of the U.S. government. However, during a government shutdown, investors may become concerned about the government’s ability to meet its debt obligations, leading to a decline in Treasury bond prices.
If you hold Treasury bonds in your investment portfolio, you may see a temporary decrease in their market value. Keep in mind that the impact is typically short-lived, and Treasury bonds remain one of the safest places to park your money during times of economic uncertainty.
Certain sectors of the economy are more vulnerable to government shutdowns than others. For example:
Healthcare: Companies that rely on Medicare or Medicaid reimbursements may experience delays in payments, affecting their cash flow and profitability.
Defense: Defense contractors may face disruptions in government contracts, which can impact their revenues and stock prices.
Transportation: Airline stocks could be affected by delays in Federal Aviation Administration (FAA) approvals, and transportation companies may see delays in government-funded infrastructure projects.
While government shutdowns can be concerning, they can also present investment opportunities. Stock prices may temporarily dip, creating buying opportunities for long-term investors. Additionally, during a shutdown, policymakers often engage in negotiations to resolve budget issues, which can lead to compromises and policy changes that benefit specific industries or companies.
We have created Worry-Free Retirement Blueprints for our clients to keep them sheltered from this type of situation. Our goal is for you to “Worry less so you can live life more.”
Skybox Financial Group