Image Source: Pixabay

Well, they did it… 

Congress and the White House couldn’t agree on a funding bill to keep the government open. Now the 21^st government shutdown since 1976 is underway. 

Most of the past shutdowns were resolved in less than three days. If you blinked, you missed them. But there have been a few that lasted for multiple weeks. The longest to date – which was in the middle of Trump’s first term – lasted 34 days.

So, what’s the story here? 

Is this shutdown any different to the prior ones?

Far more importantly, what’s the takeaway for our portfolios?

Let’s break it down. 

Virtually all prior shutdowns have been performative kabuki theater. This one is no different in that respect. 

The government isn’t really shut down. Most of it will continue to operate and generally make our lives miserable. 

And any imagined cost savings are ephemeral. All of the bills that didn’t get paid during the shutdown get paid as soon as it ends. 

At least that’s always been the case… until now. 

This time could be a little different depending on how things play out because Trump’s administration has pledged to use the shutdown as an opportunity for permanent layoffs of federal workers and to cut government programs. 

On the surface, that’s not a bad thing. 

As of the end of last year, there were over 3 million federal employees. The government can do what every other employer does and get lean, squeezing more productivity out of fewer workers. I applaud any effort to cut spending. 

But we’ve already seen this movie and we know how it ends. 

Elon Musk’s DOGE embarked on the most aggressive government cost-cutting program in living memory earlier this year. The South African billionaire pledged to shave $2 trillion off the budget and make the government radically more efficient. 

None of that happened. 

For all fanfare, DOGE only cut a reported $180 billion, and even this is dubious because federal spending actually grew this year. 

So, while Trump might play hardball and pledge to make parts of the shutdown permanent, I won’t believe it until I see it. 

So… what does this mean for our investments?

Ride the Wave, But Stay Tethered to Safety

Let’s start with some basics… 

The trends that were in place before the shutdown are still in place today and will remain so once the shutdown ends, whether that’s tomorrow or a year from now. 

Uncle Sam is still $37 trillion in debt and adding close to $2 trillion more with every passing year. Whatever imagined spending cuts the shutdown produces won’tmaterially change this. 

It’s no coincidence that gold hit new all-time highs in the runup to the shutdown. The fiscal path of the country is unsustainable and the only way the debt gets repaid is in depreciated dollars. 

If you don’t already own gold, I’m not sure what you’re waiting for. 

If you’re concerned that the price has moved too far too fast and might be due for a pullback, then ease your way in gradually. Average in, little by little, over the course of a few weeks or months. 

What about stocks?

The story here is a little more complicated. 

Past shutdowns have had virtually no impact on the stock market. In fact, the last one – that lasted a record 35 days – saw the S&P 500 actually rise 9%.  

So, the most likely scenario here is the market continues its upward trend.

That said…

This is also one of the most expensive stock markets in history. The S&P 500 is trading at 30 times earnings and 3.4 times sales. A market that expensive is the proverbial bug in search of a windshield. 

The economy is also far more fragile than the headline numbers indicate. Yes, the GDP grew at a 3.8% clip last quarter. But if you strip out the effects of falling imports, the economy actually shrank. 

So, in a world where the market is priced for perfection… while the economy may very well be in the early stages of recession… it wouldn’t take much to send the bull market into reverse. 

Great. 

What do we do about it?

My recommendation is to stay nimble. 

Hold on to your core stock positions, but also keep a little extra cash on hand. 

And, importantly, have risk management in place, such as stop losses. 

If the market continues to blast higher, great! You can follow the trend. 

Just be sure you have a plan in place for when to take your profits or cut your losses. 

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