View on the Shutdown and Debt Ceiling
As the Federal government shutdown moves into its second week, we wanted to offer a view on the situation. This is the first of two fiscal battles to be fought this month – with the “debt ceiling” battle coming to a head in about a week.
Background on the Shutdown
This is the 18th time the Federal government has been shut down and the first time since 1996. Because it has been many years since Congress passed a budget bill, the government has been operating based on Continuing Resolutions (“CRs”). As we have seen over the past week, military, air traffic control, and other services deemed “essential” will continue; however, many hundreds of thousands of Federal employees are not working.
If Congress does not come to a resolution within another couple of weeks, the economic impact could multiply. Some estimates show a decline of economic growth between 0.3% and 1% - depending on how long the shutdown lasts. So there will be a slowdown as a result, but it’s unlikely to plunge the economy into a recession.
Background on the Debt Ceiling
A fight over the debt ceiling will have much greater, widespread implications. Treasury officials estimate that the US will need to borrow additional money by October 17th. However, the government cannot borrow more unless Congress increases the total debt the nation is allowed to issue.
As we saw with the last debt ceiling dispute in 2011, there is the potential for significant market volatility. And we may very well see a significant downturn based on the dysfunction in Washington.
Looking Ahead
The good news is that any compromise deal may be made before markets are really spooked by the impending default on US debt. Given possible political brinksmanship and highly charged emotions , we would not be surprised to see double digit swings in market returns; however, we think that markets will recover fairly quickly as they did in 2011.
We are not suggesting selling equities in anticipation of a major downturn – especially since there is no easy way to see when a compromise would be imminent. Instead we may see the volatility as a possible opportunity to rebalance into asset classes made cheaper by this political dysfunction.