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."

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."

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