Don't Let the Next Dow Mini-Panic Trick You

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Investors have spent the last week and a half concerned about various potential negative shocks to the stock market, not least of which has been the possibility of the federal government shutting down. Regardless of whether a government shutdown happens or is averted at the last minute, there's a long list of follow-up worries to take its place, including a potential debt-ceiling debate. Yet even though the Dow Jones Industrials (DJINDICES: ^DJI  ) have lost more than 3% over the past eight weekdays largely on those fears, it's important to remember how many times similar threats ended up turning out just fine. Let's take a look back at a few equally troublesome episodes.

August 2011: U.S. Treasuries lose their "AAA" credit rating
Two years ago, Standard & Poor's decided to downgrade the credit rating of the United States, citing concerns that the "debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy." The Dow dropped 635 points the following Monday.

But it only took five trading sessions for the index to regain all of its losses, as investors realized the downgrade didn't lead to massive Treasury sales or a collapse of the bond market. Indeed, interest rates actually fell following the news, and a "AA+" rating for U.S. Treasuries has been more than adequate to provide low borrowing costs to the federal government since then.

December 2012 to January 2013: fiscal-cliff debate and resolution
At the end of last year, taxpayers and lawmakers both had big worries about how to handle the looming expiration of low tax rates that had prevailed for a decade. Taxpayers of all income levels were under threat, with payroll taxes slated to hit even modest wage-earners, while top-marginal-rate increases would have greatly hiked taxes on the wealthy.

Investors felt reasonably confident that a deal would get done, as share prices fell only about 1% during the last two weeks of the year. In the end, an after-the-last-minute deal was reached, and the Dow immediately rose to start 2013 with a strong bull-market rally.

June 2013: Federal Reserve "tapering" controversy
In the days surrounding the June 2013 Federal Reserve announcement that was widely seen as the beginning of the end for its quantitative-easing program, the Dow lost 650 points in just a week's time. Interest rates continued to climb precipitously, raising the specter of a slowdown in the housing market and mortgage activity that could have put the economic recovery at risk.

Interest rates have largely stayed at elevated levels, but the Dow hasn't hesitated to rise to new highs. Moreover, this month's somewhat surprising move by the Fed not to change its bond-buying has led many investors to believe they were premature in thinking quantitative easing was on the way out.

Don't panic
A government shutdown could create another temporary drop similar to these events. But the markets will almost certainly rebound -- and could do so in quick order if any problems are resolved smoothly.

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