Thoughts on the Government Shutdown

Although it’s already been nearly a week since the Federal government shutdown, Congress seems no closer to reaching an agreement. In our view, it seems most likely that a comprehensive agreement will be reached in advance of the October 17 debt ceiling deadline. Press reports continue to indicate that both sides are interested in dealing with a government funding bill and debt ceiling at the same time.

A shutdown is not as scary as it seems on the surface. This view has been supported by the market’s reaction – it has pulled back only modestly. Money will continue to flow in and out of the Treasury Department, allowing Social Security recipients to receive their payments and interest on debt to be paid.

The ultimate overall economic impact of the shutdown depends largely on how long it lasts. Due to the timing, the shutdown and the subsequent resumption of activity are likely to both occur in the fourth quarter. As a result, as long as US politicians avoid shooting themselves in the foot over the federal government debt ceiling, the outlook remains reasonably encouraging. This view is primarily a function of the market’s recent history (and relative comfort) with heightened partisan entrenchment and thoughts that both sides are fully cognizant of the potentially catastrophic consequences of a default. Recent comments from House Speaker Boehner have also been somewhat reassuring.

While the final outcome remains uncertain, BWFA believes that both sides are fully cognizant of the implications that would result if the situation is not resolved. In this environment, we continue to focus on valuation when selecting stocks for client portfolios guided by our belief that it remains a stock picker’s market.