As we ended last week with no end in sight for the government shutdown, the economists were weighing in on its potential impact. In a recent WSJ article, the conclusion was that "The furloughs are likely to knock 0.1 to 0.2 percentage point off the annualized rate of fourth-quarter economic growth for each week that it lasts."
There are a wide range of views as some feel that the chances of a big economic shock and severe market decline have increased significantly while others worry about the complacency. Others are not expecting such a significant impact as they feel that the markets have already priced it in and a "shutdown for a couple of weeks would be unlikely to be detrimental."
There is more agreement regarding the impact of a failure to raise the debt ceiling but most feel that the adults won't let that happen. Global monetary authorities are also voicing their opinions as the IMF's Christine Lagarde expressed her concerns over the debt ceiling while the ECB's Mario Draghi is concerned over the impact of a prolonged government shutdown.
In the past two years, there have been three example of politically induced panic selling. The first started in late July and early August of 2011 as the debt ceiling debate ended in a stalemate. This was a decline that was difficult to withstand as the S&P fell from an early July high of 1356 to an October low of 1074. This was a drop of 20.8% from high to low. Soon after the October low, there were clear signs from the market internals that a low was in place.
The markets also reacted poorly to the re-election of President Obama as the Dow Industrials lost 800 points in eight days. The next month, stocks dropped 3.5% at the end of December in reaction to the fiscal cliff stalemate. Before this decline, the A/D line broke out to the upside indicating a pullback would be a buying opportunity.
What about now?
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