Washington Woes…Again

Seth J. Masters (pictured) and Dianne Lob

There is no way to accurately assess the impact of the US government shutdown that began today, since we do not know how long it will last. In the past, such shutdowns have been short-lived and have not had a major economic and market impact.

In the 11 previous government shutdowns since 1981 (display), most of which have lasted three days or fewer, the effects on stock performance were generally modest. If this shutdown lasts for some time, the potential economic and market impact could be more severe.

Most Prior Shutdowns Had Only a Modest Effect on S&P 500 Index Returns

Approximately 800,000 federal employees out of a workforce of about 2.9 million were furloughed. While essential services will continue to be funded, many nonessential activities will be shuttered. The shutdown will not affect the government’s ability to service its debt or maintain essential programs that have dedicated funding, such as Social Security, Medicare and Medicaid.

In assessing the potential effects of a shutdown, it is always important to consider the state of the underlying economy. In this case, the signals at the end of the third quarter remain solid: unemployment has been reduced, the housing markets have improved significantly, economic growth and corporate earnings continue to be solidly positive, and the Fed remains extraordinarily accommodative.

On the negative side, the inability of Congress to reach a budget agreement and the now-looming debt ceiling increase the possibility of another credit downgrade for the US. While the initial downgrade of the US by Standard & Poor’s had little market impact, a second downgrade has the potential to spur a more negative reaction in the markets. In addition, none of these short-term issues speaks to the long-term budget imbalance.

Don’t Shut Down Your Long-Term Investing Plan

Despite the current political wrangling, the private sector is continuing on a healthy path of economic recovery, with many companies displaying robust fundamentals. Consequently, we caution investors not to overreact to the “sound and fury” out of Washington, at least at this point in the shutdown, which may be short-term, as so many past shutdowns have been.

Expect Heightened Volatility

We believe that the current shutdown and the impending battle over raising the US debt ceiling this month will contribute to a rise in market volatility over the next several weeks. Today’s political intransigence does need to be watched, however, especially its implications for the debt-ceiling debate and its potential impact on the economy and markets.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio managers.

Seth J. Masters is Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.

Dianne F. Lob is Chairman, Private Client Investment Policy Group at Bernstein Global Wealth Management, a unit of AllianceBernstein.

Seth J. Masters

Seth Masters is Chief Investment Officer of Asset Allocation, Defined Contribution Investments and Bernstein Global Wealth Management and a Partner at AB. He oversees the firm’s asset-allocation portfolios, including Private Client, Target Date, Target Risk, Dynamic Asset Allocation, Inflation Protection and Risk-Management Strategies. In June 2008, Masters was appointed to head AB’s newly formed Defined Contribution business unit. He became CIO of Blend Strategies in 2002 and launched a range of style-blended and asset-allocation services that have since become a significant portion of the firm’s assets. From 1994 to 2002, Masters was CIO of Emerging Markets Value Equities. He joined Bernstein in 1991 as a research analyst covering global financial firms. Over the years, Masters has published numerous articles. Prior to joining Bernstein, he was a senior associate at Booz, Allen & Hamilton from 1986 to 1990 and taught economics in China from 1983 to 1985. He earned a BA from Princeton University and an MPhil in economics from Oxford University. Location: New York

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