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AP: Economy Won’t Be Hurt By A Gov’t Shutdown

From the Associated Press:

Why investors shouldn’t fear a government shutdown

Past US government shutdowns haven’t caused the stock market to melt down

Steve Rothwell and Ken Sweet, AP Markets Writers | September 28, 2013

NEW YORK (AP) — The government shuts down. The economy unravels. Stocks plunge. That may be Wall Street’s worst fear, but history shows it’s mostly overblown.

Has the Syrian Electronic Army hijacked the AP’s servers again?

There have been 17 government funding gaps and shutdowns since 1976, ranging in length from one to 21 days. A funding gap is when federal agencies continue to operate without the passage of a regular appropriations bill. None has caused a market meltdown.

The average decline in the Standard & Poor’s 500 index during one of these periods lasting 10 days or more is about 2.5 percent. For those lasting five days or fewer, the average decline is 1.4 percent.

"If they shut the government down for two days, the world’s not going to stop revolving," says Ron Florance, deputy chief investment officer for Wells Fargo Private Bank.

A shutdown may even offer a buying opportunity. Investors should consider the improving outlook for the global economy instead of worrying about Washington

Sigh. Just when we thought the AP was turning a new leaf and starting to report the truth, they go back to telling us how the economy is improving.

During Ronald Reagan’s presidency from 1981 to 1989, shutdowns were a fairly regular occurrence and the government faced a funding shortfall on eight occasions. However, none of those lasted more than three days and many of them occurred over a weekend. Because stocks don’t trade over the weekend and the shutdowns were brief, investors had little reaction back then.

When shutdowns are prolonged and federal employees are out of work for weeks, the effect on the market is usually more negative. Under the Gerald Ford and Jimmy Carter administrations, when the government was shut down for 10 days or more, the average decline for the stock market was more than 3 percent during closures.

All of a sudden we are hearing about shutdowns of the past. Why is that?

But in the last major pair of shutdowns, from November 1995 to January 1996, the stock market actually rose.

President Bill Clinton and the Republican House leader Newt Gingrich failed to agree on a plan to reduce the nation’s budget deficit as well as cuts to Medicare premiums. As a result, the government shut twice in three months. First, it closed for five days between Nov. 13, 1995 and Nov. 19, 1995. Then a second shutdown lasted 21 days, from Dec. 15, 1995 to Jan. 6, 1996.

The S&P 500 rose 4 percent between Nov. 13 and Jan. 6, suggesting that investors were focused elsewhere. The stock market had just started its five-year, technology-fueled bull run, during which the S&P 500 more than doubled…

Hell’s bells. The AP is even reporting that the stock market actually went up the last two times the government shutdown in 1995 and 1996.

Is it worth rearranging your stock investments? No…

We suspect we are only seeing this ‘news’ because of three things: 1) The AP feels that they have already done a good enough job scaring the low information voters. And this is aimed at financial people.

2) The AP doesn’t want the economy to get (even) worse before the midterms. Even if they could blame it on the Republicans.

And, 3) the AP wants to be able to say they ‘told us so’ when the economy doesn’t collapse even if the government shuts down and/or there is no debt ceiling deal.

Besides, there are plenty enough other stories from the rest of the news media warning us that the world is going to come to an end.

This article was posted by Steve Gilbert on Monday, September 30th, 2013. Comments are currently closed.

2 Responses to “AP: Economy Won’t Be Hurt By A Gov’t Shutdown”

  1. captstubby

    but the printing of ObamaBucks will continue.

    Fed Reserve to Continue $85 Billion a Month Quantitative Easing

    by Wynton Hall 18 Sep 2013
    The Federal Reserve announced on Wednesday it will continue its unprecedented $85 billion a month bond-buying strategy despite earlier indications it would begin tapering its controversial quantitative easing policies.
    The announcement comes as the Fed has downgraded its outlook for the U.S. economy. The Fed now projects that the economy will grow at an anemic 2% to 2.3%, rather than its earlier forecast of 2.3% to 2.6% growth.
    The Fed’s quantitative easing policies have already pumped $2.8 trillion into the economy, but a new Reuters poll finds that 73% of Americans do not even know what quantitative easing means. Quantitative easing is when the Federal Reserve buys securities to drive down interest rates and prop up the economy.
    The Dow and S&P 500 surged to record highs after the Fed’s announcement; the Fed’s easy-money policies and suppressed interest rates give banks free money to invest and leverage.
    “The Fed has been robbing America’s poor and middle class and essentially underwriting the wealthy, the big banks and big business,” explains Jonathon Trugman, writing in the NY Post. “The twisted maneuvers of grand larceny-like proportions have underwritten the greatest transfer of wealth this generation has ever seen.”
    Bankrate.com senior financial analyst Greg McBride said, “The primary goal here is to push money into riskier assets, whether it’s equities or the housing market.”
    The Federal Reserve’s balance sheet now stands at an unprecedented $3.6 trillion. Prior to the recession, the Fed’s balance sheet was less than $1 trillion.

    Bloomberg News.
    Monday, 30 Sep 2013 10:11 AM
    Three rounds of Fed stimulus and better-than-forecast corporate earnings have pushed the S&P 500 up 150 percent from a March 2009 low.
    U.S. lawmakers face their next fiscal dispute over raising the $16.7 trillion debt ceiling. The Treasury has said measures to avoid exceeding the limit will be exhausted on Oct. 17.
    The debt limit is a bigger problem than a federal shutdown, though the U.S. will probably avoid both, Moody’s Investors Service said in a report today.

    The benchmark gauge has added 2.7 percent this month, extending its quarterly gain to 4.4 percent, as the Federal Reserve kept its $85 billion of monthly bond-buying.

    In a government shutdown, essential operations and programs with dedicated funding would continue. The Treasury will sell debt, while economic reports from the Commerce Department will be suspended and the Bureau of Labor Statistics will stop operations. Commerce is scheduled to release data this week on construction spending and factory orders before the Labor Department’s closely watched jobs report on Oct. 4.

  2. I fear the government will come back. ‘Shutting down’ will be the best thing possible for all of us.




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