Government Shutdown's Investor Impact Is Unclear

Disruptions in Washington don't mean markets will sink, but the affects could be felt in lots of ways.

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Roger Wohlner

Our “leaders” in Washington continue argue like the pouting children, and the government officially shut down on October 1. While some reports note only about 18 percent of actual government spending is impacted, the consequences for markets and investors are very difficult to anticipate. That said, here are a few thoughts on aspects of the shutdown that could potentially impact markets, the economy and individuals.

Furloughed government employees cannot make contributions to their thrift savings plan. This is the excellent equivalent to a 401(k) plan offered to many government employees. While on “non-pay” status these employees cannot make retirement contributions, receive any matching contributions from their employer or initiate new loans from the plan. Should these employees need to tap their plan to meet their needs during the shutdown they could make a hardship withdrawal. This however precludes them from participating from the plan for six months. All in all I suspect that a brief shutdown will have little or no impact on the long-term retirement savings efforts of these workers, but a longer shutdown might.

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Reduced consumer spending by furloughed government employees. I've often read that consumer spending accounts for a high percentage of economic activity. To the extent that furloughed employees cut back on their household expenditures, a prolonged shutdown could slow economic growth in general and impact sales at retailers like Wal-Mart, Best Buy, and others. This could in turn impact revenues at companies that supply these retailers and so on. Stocks of these retailers and their suppliers that are publicly traded might be impacted and to some extent mutual funds with positions in these stocks might suffer as well. Again this is general and speculative. The real impact, if any, remains to be seen.

The travel and lodging industry might be impacted. National parks are closed as are most of the monuments and tourist attractions in Washington DC. (New York escapes some pain as Ellis Island and the Statue of Liberty were already closed for repairs.) To the extent that tourists cancel travel plans and don't stay in hotels, eat in restaurants and buy souvenirs this will impact these businesses in those specific areas and potentially their workers. How large will this impact be? Will it be large enough to impact shares of hotels or the airlines? That's not clear.

Government economic data will stop. As I watch CNBC this morning there was much discussion that economic data on topics such as jobs, economic growth and other statistics will cease during the shutdown. It's not clear how these disruptions will impact traders.

Some speculate that a prolonged shutdown will cause a drop in the stock market. Like any other major event the talking heads are having a field day. But they have as much chance of being right as do the captains at the coin toss prior to a football game. To the extent that the markets do drop it may present a buying opportunity as some suggest. Then again it may not.

The bottom line here is that there have been and will continue to be many articles and discussions about, "How to play the government shutdown." The reality is that the impact on the economy and your investments is unknown. Altering your long-term financial plan in anticipation of this or any major economic event is rarely a good idea and I suspect that will be the case this time around as well.

Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger's popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans.