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Main Street: How to Handle the Government Shutdown as an Investor

Source: Main Street

Author: Ellen Chang

Investors should avoid reacting to the first government shutdown in 17 years by selling off their equity holdings, investment advisors said.

Instead, some investment experts recommend that investors ramp up their holdings and take advantage of any dips in the market by adding equities and gold to their portfolio.

The current government shutdown should not be viewed as a threat to the financial markets, said Bill Peattie, founder of Peattie Capital Management and a portfolio manager on Covestor, a registered investment advisory.

The market will perform well over the long term as the economy rebounds, he said.

"Longer term, even with the onset of tapering sometime in the next three to 12 months, there is still enormous liquidity in the system and reasonable valuations in a number of parts of the market," he said. "On balance, global economies are improving, albeit slowly and sporadically."

The stock and bond markets have reacted positively overall to the past 17 shutdowns since the current budget process started in the 1970s, said Bill Stone, chief investment strategist of PNC Wealth Management.

Since it is unlikely for the shutdown to occur for longer than a brief period, investors should expect only to experience "short-term volatility" in the market, he said.

"We do not expect long-term market or economic damage," Stone said. "Over the longer term, markets have been rather unflappable in response to government shutdowns. However, in our opinion, a government shutdown may lead to a more contentious fight on the debt limit, which could cause some volatility as the projected October 17 debt limit date approaches."

The S&P 500 on average experienced "only modest downward pressure before, during and immediately after the past 17 shutdowns," he said. The S&P 500 declined 0.2% during shutdowns and usually rebounded within 10 days after the government shutdown ended.

Over the 1995-96 two-period impasse, the S&P 500 was up 4.0%, Stone added. During the six shutdowns that lasted more than five trading days, the S&P 500 fell a median of 2.0%.

"We believe this is not a time or a reason for investors to move to the sidelines," he said.

Investors should examine their portfolios and add more equities to the mix while prices are cheaper, said Peter Cohan, adjunct lecturer at Babson College and president of Peter S. Cohan & Associates, a management consulting and venture capital firm.

"Now is a good time to buy stocks," he said. "Nervousness related to the government shutdown may drive down prices making them less expensive. In the last four years, stocks have risen an average of 22%. Over the last 200 years, they average about 7%."

Stocks are a better asset class for an investment since gold's volatility is often hard to explain while bonds "are a poor investment because the Fed is likely to raise interest rates next year, which will make their prices fall," Cohan said.

The market will continue its upward trend once the shutdown ends, so investors should hold onto their stocks and mutual funds and avoid a more conservative approach , said Anton Bayer, CEO of Up Capital Management.

"For investors who have remained invested in stocks or stock mutual funds this year and ignored all of the market headlines, it's been a great year," he said. "Indexes hit all-time highs on September 18 and have since declined 2.5%. Investors can expect some volatility, but once the nonsense in Washington is resolved the markets may recover and resume its upward trend."

The positive news about the economy last week that was reflected in the initial jobless claims, new home sales and GDP have been overshadowed by the political discord, said Dan McElwee, executive vice president at Ventura Wealth Management.

"Markets should expect to have a tumultuous week," he said. "Surely, as rumors persist about cacophony and compromise, different asset classes will come under accumulation or distribution."

The volatility and uncertainty in the market this week is a good opportunity for investors to take a position in gold or silver, said Scott Carter, CEO of Lear Capital, a Los Angeles precious metals firm that sells physical gold, silver and palladium to retail investors. A prolonged shutdown or lack of agreement on a debt ceiling increase will be bullish for metals, he said.

"Gold and silver represent a valuable diversification asset during these volatile economic times," Carter said. "Gold and silver could represent at least 5% of a diversified portfolio. If an investor is underweighted, then today could be a great time to add a position."

A prolonged government shutdown will affect the economy negatively since government spending represents over 20% of annual GDP, he said.

"Any hiccup in these expenditures slows the overall economy and will impact jobs and wages," Carter said. "The sell-off today in all commodities could be driven by this assumption. While gold and silver are selling off with all commodities today, if economic growth slows and the economy feels the pinch, then these hard assets will benefit over time."

Since political risk is a constant threat to investor's portfolios, investors can protect themselves by holding 10% to 20% of their portfolio in precious metals such as gold and silver, said Jonathan Rose, president and CEO, Capital Gold Group.

"Equity markets have performed fairly well in the years after the great financial crisis, but investors must solidify their portfolios and protect their wealth from these types of political risk," he said. "As investors question the U.S. government's competency during a shutdown they will turn to safe-haven gold as portfolio protection and a store of wealth."

Even if the market tanks over the short term, equities will likely rebound like they did in the 1990s, said Charles Sizemore, a portfolio manager on Covestor, who advsised investors to avoid panicking.

"My point is simply that the debt ceiling crisis doesn't matter," he said.

Investors appear to have "disregarded the shutdown," said Chris Gaffney, senior market strategist, EverBank Wealth Management, based in St. Louis.

"It is a non-event as the markets have become somewhat numb to our dysfunctional Congress," he said. "Equities have recovered after opening down, metals got sold at the New York opening bell after holding steady in overnight trading and bonds recovered some of their losses which they sustained just prior to the shutdown."

The sell-off in gold is "curious and certainly presents investors with an opportunity," Gaffney said. However, precious metals were largely unchanged throughout Asian and European trading, he said.

"Demand continues to increase in both China and India and this should be supportive of gold in the medium and longer terms. Precious metals are traditionally seen as "safe havens," so if the shutdown continues, we should see some additional buying interest coming out of Western investors."

--Written by Ellen Chang for MainStreet