Thursday, July 7, 2011

1995 Redux?

I have been surprised by the number of calls that I have been receiving regarding the political stalemate in Washington.

More specifically, my clients are worried that our government might decide to either delay or default on its debt obligations.

All recognize, of course, that the U.S. has the ability to pay its obligations, but there is a real concern that some elected officials are willing to permanently scar our pristine credit rating in order to score a few political points.

Perhaps it reflects the national mood (please see my post from yesterday), but there seems to be a widespread cynicism about our elected officials - even more than normal.

The last time we had this degree of acrimony regarding our budget deficit was in the mid-1990's.

As some of you might recall, President Clinton had just suffered a "shellacking" in the mid-term election in 1994, and the House Republicans lead by Newt Gingrich were determined to change the direction of the federal government (sound familiar?).

Thus, in the fall of 1995, the federal government essentially shut down for a few weeks as an intense political battle ensued. Here's an excerpt from Wikipedia:

When the previous fiscal year ended on September 30, 1995, the president and the Republican-controlled Congress had not passed a budget. A majority of Congress members and the House Speaker, Newt Gingrich, had promised to slow the rate of government spending; however, this conflicted with the president's objectives for education, the environment, Medicare, and public health.[1] According to Clinton's autobiography, their differences resulted from differing estimates of economic growth, medical inflation, and anticipated revenues.[2]

In response to Clinton's unwillingness to make the budget cuts that the Republicans wanted, Newt Gingrich threatened to refuse to raise the debt limit, which would have caused the US Treasury to suspend funding other portions of the Government to avoid putting the country in default.[

As unsettling as it might have been to the public, the shutdown actually improved the mood of stock market investors: the S&P 500 rose by +36% in 1995, and another +20% in 1996.

Put another way, then, in the current situation is that it is not clear what the reaction of the market will be if the budget showdown cannot be resolved.

In addition, simply selling stocks at this point raises the same question: What do you do with the money?

Hopefully all of this is simply hypothetical.