The United States government shut down at midnight on Tuesday, October 1, 2013. Republicans are working to defund, or at least delay, the Affordable Care Act, also known as Obamacare. Democrats are adamant about keeping the previously-passed legislation and making sure it is funded. So, you’re asking, why the timing? Two words: Budget Deadline. The Republican-controlled House of Representatives passed a bill to fund the government without spending provisions for Obamacare and language that would delay or kill a pending medical device tax, which is scheduled to go into effect October 1, 2013. The Democrat-controlled Senate is unwilling to pass, or even vote, on the House bill before them. Neither side seems willing to debate the issue at this point.
Overall, we think the government shutdown is much ado about nothing. This is our 18th time the federal government has shut down, as a result of a failure to agree on an annual appropriations bill. We came to the brink in December 2012, but avoided what seemed to be an imminent government shutdown by kicking the can down the road. We have now caught up to the can. It is once again time to kick or make a change. The compromise worked out at the end of 2012 has allowed for a decline in government spending and a step closer to fiscal responsibility. A government shutdown should further reduce spending, but at the cost of many government jobs and potentially slowing economic growth. A shutdown occurs when a government discontinues providing services that are not considered “essential.” However, we do not believe this government shutdown will be long lived, as Speaker of the House, John A. Boehner, has indicated Republicans have no desire to let the United States default on its debt. History and current polls have shown this type of outcome to be very unpopular among voters.
Wall Street, initially, voted its disapproval on Monday with the Dow Jones Industrial Average declining by 0.84% and the S&P 500 falling by 0.6%. Historically, government shutdowns have not had a severe impact on the capital markets. During both the November 1995 and December 1995-January 1996 shutdowns, the S&P 500 increased. We expect this situation to be short lived, but in the meantime, market volatility is likely to increase. If the market dips by 3% to 4%, it might even present a buying opportunity.
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