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Government Shutdown: How Will It Impact Your Portfolio?

By Hal M. Bundrick

NEW YORK (MainStreet) ¿ The government shutdown may have little immediate impact on your investment portfolio, but a larger threat looms by mid-month, according to Wall Street analysts.

As more than 800,000 federal civilian employees and as many as 1 million workers face furlough, expect an increase in market volatility at the very least, says Russ Koesterich, chief investment strategist for BlackRock.

"A pickup in volatility can be a short-term negative for stocks since a shutdown would modestly hurt fourth-quarter economic growth and cause a dent in consumer confidence," says Koesterich in an analysis. "However, assuming that any government shutdown is resolved within a week or two, we do believe that the longer-term impact will be limited. Investors should prepare themselves for more market volatility, but we would expect only a modest correction in stock prices."

Must Read: Financial Advisors Forecast Bigger Profits, Stable Markets

But Koesterich says the situation may change abruptly in the coming weeks if Congress and President Obama don't come to an agreement to raise the $16.7 trillion debt ceiling, forcing the U.S. into a technical default on its debt.

"This would be a much more serious situation," he says. "A technical default on U.S. debt would cause a significant blow to the global financial system, would almost certainly cause a sharp pullback in stock prices, particularly U.S. stocks, and would be a negative for fixed income credit sectors. In fact, about the only asset class that would benefit from a debt ceiling breach would be gold."

In 1995 and 1996 the federal government faced two shutdowns and the stock market remained resilient, notes Roger Aliaga-Díaz, a senior economist for Vanguard. "In fact, markets were defiant, and broad equity and bond prices rose against the pessimism," he adds.

But Aliaga-Díaz also cautions that the stakes are high as lawmakers face the next challenge.

"The debt-ceiling discussion has a big symbolic component," he says. "If Congress actually failed to increase the limit, it would mean a tremendous fiscal squeeze of the size of the budget gap and a significant challenge for the 'full faith and credit' of the U.S. government. The impact on the economy from such a dysfunctional political outcome would be unthinkable."

--Written by Hal M. Bundrick for MainStreet

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