The political brinkmanship on display in Washington has created what could be a short-term buying opportunity, according to some market watchers.
With the Dow Jones Industrial Average down more than 100 points in midday trading on fears that political infighting will lead to a partial government shutdown Monday night, investors are acting as if something much worse is in the works.
“If the government shuts down, they might cancel White House tours, and you might not be able to visit some national parks, but right now the stock market is offering buyers a discount,” said Douglass Cote, chief investment strategist at ING U.S. Investment Management. “Yes, the government may, in fact, shut down today due to a lack of a continuing resolution passed by Congress to fund the government, and investors should use this as a opportunity to get a full allocation to the markets.”
The clich� that the markets don't like uncertainty is clearly in play and most analysts think that the markets could fall further if the shutdown actually happens.
But from a fundamental perspective, there is no good reason to flee the markets at this time.
“To me, this is all just noise, and we try to block it out,” said Mark Travis, manager of the Intrepid Capital Fund (ICMBX).
“There will be some nonessential services that could stop, but unless you're planning to visit the Lincoln Memorial, you probably wouldn't notice it,” he said. “From our perspective, prices are still not cheap for stocks or bonds, and we're not cheering for a bloody mess, but if one appears we have the resources to put some money to work.”
Mr. Travis cited a similar market reaction in August 2011 when U.S. debt was downgraded and stocks saw a few single-day drops of up to 5% over the following next week.
“We've been through a very benign period this year with very low volatility,” he said. “Right now, you've got equity indexes that are up more than 20%, so it's not inconceivable that some people will decide they're happy with that return, and they want to take some of the profits.”
Virtually across the board, market watchers aren't buying into the Washington hype.
“If you're a stock buyer, you're buying stocks into this, but there's no way to handicap whether or not the government will be shut down,” said Aaron Izenstark, chief investment officer at Iron Financial LLC.
The logic behind the sell-off ahead of a government shutdown follows that it will dramatically reduce government and business spending and increase consumer fears about the economy, forcing reduced spending at the consumer level.
“When people are nervous, they stop spending money,” Mr. Izenstark said.
But even if consumers are getting nervous about the latest mess in Washington, the macroeconomic picture continues to tell a different story.
“Corporat! e profits and retail sales are at record highs, the trade deficit is going down because of shifts in energy and the economy is in pretty good shape,” Mr. Cote said. “This day-to-day political brinksmanship has become part of the normal political process, and if investors try to Washington-proof their portfolios they will be whipsawed at best.”
Mr. Cote added that one need look no further than third-quarter market performance to understand why it makes sense to be globally diversified.
The S&P 500, which was up 20.5% this year through Friday, gained 5.9% in the third quarter, including 3.8% this month.
The emerging markets are down 3.7% from the start of the year, but gained 10% in the third quarter, including 9.7% this month.
Developed Europe is up 17.7% this year, and gained 12.7% in the third quarter, including 8.5% this month.
“This is the first time all year that global diversification has worked,” Mr. Cote said. “The rest of the year I'm calling it the mean-reversion trade because I think the global equity markets continue to outperform U.S. equity markets.”
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