Global CIO Commentary by Scott Minerd
The U.S. government has shut down 17 times since 1976, but the current brinksmanship unfolding in Washington has the potential to last longer and have a more pronounced effect on markets than previous examples. Uncertainty over the drama on Capitol Hill is leading to higher volatility, but weakness in asset prices likely represents a buying opportunity. There are also favorable investment options outside of the United States, which will benefit from ongoing loose monetary conditions. There is little incentive for either the Democrats or Republicans to agree to a budget deal before October 17th, the forecasted date when the debt ceiling will need to be raised. Because the U.S. government is no longer spending, there is also a chance that this date could move further out on the horizon. The consensus estimate is that each week of the shutdown will reduce 4Q GDP by 25 basis points, meaning that fourth quarter growth could be up to 75 basis points lower by the time the shutdown is over. This is especially significant given that the expectation for 4Q GDP is only currently around 2.5 percent. Having said this, there is no risk that the U.S. Treasury will default in the coming weeks. Importantly, these political headwinds represent relatively isolated shocks to GDP, and their effects will likely recede fairly quickly given the torque in the underlying economy. Leading indicators show no sign of a recession, and a resurgence in output growth could still occur during the first half of 2014. There are a number of ways for investors to take advantage of the political dysfunction in Washington. Historically, equities rally when uncertainty over a shutdown begins to subside, so there is a case for buying stocks, which have fallen in seven out of the last nine sessions. Stifled growth also means that interest rates have further room to leg down, which is supportive of fixed income assets. Finally, there are abundant opportunities for excess returns outside of the U.S. right now, with both European and emerging market equities offering attractive valuations and improving fundamental outlooks.
Gauging the Impact of Government Shutdowns
There have been 17 U.S. federal government shutdowns since 1976. Excluding drastic moves in commodity prices and bond yields in the late 1970s, analysis of eight occasions during the past 30 years reveals that U.S. equities and the dollar tend to decline during shutdown periods, while gold and commodities tend to perform well. Shutdown periods do not appear to have a significant effect on 10-year Treasury yields. Historically, when a shutdown ends, market performance reverses quickly, and Treasury yields fall by an average of 22 basis points over the following 10 days. The economic impact of a shutdown largely depends on its duration. According to consensus estimates, a week-long shutdown would cut annualized GDP growth by approximately 25 basis points in the fourth quarter.
AVERAGE PERFORMANCE OF SELECTED ASSETS DURING GOVERNMENT SHUTDOWN PERIODS (1983 - PRESENT)
Source: Bloomberg, Guggenheim Investments. Data as of 9/30/2013
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 3.31.2019 and includes leverage of $11.3bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.