Government Shutdown Market Impact

A recent Friday, late in the evening, Congress and the White House came to an agreement that averted a partial government shutdown – for now. Over the course of last week, several advisors asked for my take on what would happen to the stock markets if the government had closed down, even temporarily. Some of these advisors following the active approach to investment management, wondered if they should “sell,” or if should they “buy.” Would the markets go up? Or would they go down? How should they react?

My advice was that if client portfolios were properly designed from the beginning, there would be no need to make any changes to existing portfolios.
This is a key element of our passive, academic approach to investing. Remember that all knowable and predictable information is already reflected in the price of a security. It is only unknowable and unpredictable events that causes a stock to go up or down. To put it another way, the Wisdom of the Crowds had already priced the markets with full consideration as to the possibility of a government shutdown.
Can you imagine the angst of many active investment managers as they tried to time the market, or tried to guess which stocks would go up or down just before Friday’s closing bell?