We are now in the third week of the government shutdown and we’re careening towards the first “deadline” of October 17 with no deal in sight. By that day the Treasury will reportedly have about $30 billion with which to pay its bills. That will leave less than two weeks to scrimp and scrounge before the next big deadline of November 1, at which time the government will no longer be able to make social security, Medicare, pension and other benefit payments. Then, on November 15, the government could default on about $30 billion worth of interest payments due to bondholders. Most rational market observers, meaning those not affiliated with the Tea Party, believe that defaulting on these obligations would be catastrophic to the market.
So why is the stock market within shouting distance of its all time high? Why is the VIX (volatility index) displaying nothing but complacency? To me, the answer is clear. Stock (and bond) market participants believe strongly that a deal of some kind will be reached sometime this month After that the government re-open for business, the debt ceiling will be raised and the Treasury will pays all its bills as promised. In all likelihood, this will be simply a short-term fix, meaning that in a few short months we could very well be right back in this perilous situation all over again. But that will be a story for another day. All traders care about is that the current crisis will very likely be averted.
So what does that mean to investors? It means you should remain invested. Now is not the time to bail on the market. In fact, you should use temporary market dips to add to your holdings. The Federal Reserve remains highly accommodative; and that means the party in the stock market is likely to continue for at least the rest of the year.
Personally, I put some money to work first thing Thursday morning, as the huge two day rally began. As word leaked that an accord could be forthcoming, the market soared. As it turned out, the rumors were just that, and there was no deal. Yet the rally demonstrated how much buying power is waiting on the sidelines, ready to jump in when an agreement is finally reached. Interestingly, the market opened down 100 points today as investors expressed their disappointment in the lack of progress over the weekend. Yet as trading closed ten minutes ago, the Dow Jones Industrial Average was up 64 points. This is simply a market that does not want to go down.
So if the market doesn’t care that the government is closed, you shouldn’t either. Surf’s up; time to ride the wave.