NEW YORK (TheStreet) -- The latest manifestation of dysfunction in Washington is the threat of a government shutdown because of the huge ideological divide between the Republican-led House of Representatives and the Democrat-led U.S. Senate.
The current shenanigans likely will come down to two realistic outcomes: the GOP will give in on the Affordable Car Act more commonly known as Obamacare, keeping it mostly intact, or the government will shut down for some period of time. A third unrealistic option is Republicans successfully defund Obamacare.
The outcome more concerning to markets is a shutdown. Regardless of what you think about Obamacare (I think the economics of it are lousy), it passed several years ago and, although it is moving along slower than the President would like, the attempt to defund it at this point amounts to putting the toothpaste back in the tube.
But how scared of a shutdown should investors actually be? Is this really a doomsday scenario? Many pundits are comparing current events to the brief shutdown that occurred in late 1995 and into early 1996. For all of 1995 the
was up 35% although it did endure a 2.5% dip, not even a correction, in early January of 1996 before going on to add another 30% in that year.
The point is not that a shutdown would be bullish for domestic equities, just that it may not be important as people think. My
colleague and former boss Ken Fisher has referred to these situations as big bad scary events, and often they turn out to mean nothing and are soon forgotten. Market history is full of these examples.
Part of the buildup of anxiety is the belief that this time is different. My favorite example of this comes from the summer of 2002 when, starting in August of that year, company CEOs were going to have to sign their names to their companies' earnings. This was still in the wake of Enron and Worldcom and investors were terrified of the consequence believing that CEOs would not sign causing stocks to spiral.
The reason this is my favorite example is because I have yet to bring this up in conversation with a client or prospect who remembers this happening.
Earlier this year we were told that the sequester was going to shave one percentage point off of GDP and be very bad for everyone. It may have shaved a point off of GDP but it hasn't prevented stocks from rallying 20%. The sequester wasn't bullish for stocks, just a whole lot less important than most people thought. There are many other examples that you don't remember because they meant nothing to anyone's long-term investment objective.
If you read the above examples of big bad scary events and maybe remembered a couple more, you might then think to yourself,
"Well, of course, that wasn't a big deal because...
," which is how the cognitive deficit hindsight bias works. The key for investors is to realize why something isn't a big deal before it happens, not afterwards.
Markets could certainly react to a shutdown by quickly dropping 10%, but the serious declines in markets don't historically come from political dysfunction -- they come from extreme excesses like tech stocks in 2000, the real estate market in 2006 and, perhaps as a more serious threat today, excessive accommodative central bank policy.
Whatever your investing strategy -- here investing is differentiated from trading -- it was designed to withstand small declines. If your strategy includes taking some sort of defensive action based on index levels, then you should be disciplined and stick to your strategy as opposed to trying to outguess what the market might do ahead of a possible political event.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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