Too many investors try and ride short-term news events and rumors as a way to make easy money. It seldom turns out that way.
Take the current government shutdown. Conventional wisdom says that Wall Street hates uncertainty. Furthermore, a lengthy shutdown could disrupt the still fragile economic recovery. Add that to the upcoming fight over the debt ceiling and you should have a plunging stock market. Funny thing, the stock market isn’t really going down.
Stocks and the Shutdown of the US Government
The problem, of course, is that we’ve seen this show before. Recently, Congress and the President took both the debt ceiling and funding the government to the wire but eventually reached a deal. While political partisans go red in the face discussing who won and the lost, the reality is that the overall economy, and by extension Wall Street, really doesn’t care how the pie is sliced up, as long as there is a pie.
The only real concern for investors is that the instability at the government level will eventually bleed over into Main Street and Wall Street. Some may argue that is happening right now, but the fact is, no matter how long it seems, the government has only been closed for a few days. A few weeks probably isn’t enough to do any lasting damage, and the last time Republicans and Democrats shut the whole government down, they left it closed for 17 days. That really isn’t very long once you are out of it.
Add that to the fact that no matter how frustrating or childish the process is, so far, there has always been some sort of deal worked out at the last minute, or a few minutes after the last minute. When that deal happens, the stock market typically rises as investors feel that business can get back to, well… business.
Playing the market for a fall due to the government shutdown really means playing for no deal for several days AFTER the debt ceiling is breached. After all, Congress has a habit of retroactively fixing its messes. It already has passed a law giving all government employees their full pay for the time they were off. They’ll undoubtedly make sure all government contractors get full payment as well. And, they’ll certainly come up with a way to “fix” any breach of the debt ceiling as well.
So, what is the soonest that the market could take a hit from the latest political skirmish?
Investors will likely give Congress a pass on the Friday after the debt ceiling comes due, and then the weekend as well. If Monday morning there are no signs of progress, no words of secret bipartisan backroom deal making, then and only then will the majority of investors start worrying. But, if there are any reports of a deal in the works, expect any drops to be modest, or quickly bought.
For added fun, October options expiration is Friday the 18th, so investors looking to play a drop via options better go out a month or chances are the street won’t make that investment pay off. And, come Monday October 21, if playing the short side looks smart, don’t expect to get in cheap with a full month of time premium and a whole truckload of uncertainty looking over the market’s shoulder.