The Big Threat to the DJIA Is Not a Government Shutdown

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.

The Dow Jones Industrial Average  (DJINDICES: ^DJI  )  is down today as investors fret over the potential government shutdown, but that threat is just a sideshow compared to the debt ceiling issue. Financial chaos will erupt If Congress does not raise the debt ceiling by mid-October and the government experiences a technical default on its debt. As of 1:15 p.m. EDT the index was down 101 points to 15,086, with 28 of 30 DJIA stocks in the red. The S&P 500 (SNPINDEX: ^GSPC  ) was down seven points to 1,683.

While a potential government shutdown set to happen at 12:01 a.m. Tuesday is making headlines, it won't have a visible effect on most Americans' lives unless you live in the Washington, D.C., area, where federal workers are concentrated. Mail will still be delivered, the trains will continue to run, and national-security efforts will not halt.

That said, the length of the shutdown will determine the degree to which it hampers economic growth. According to Macroeconomic Advisers, a shutdown of two weeks would reduce fourth-quarter real GDP growth by 0.3 percentage points. To put that in perspective, second-quarter GDP growth was 2.5%, so a 0.3-percentage point loss is 12% slower growth.

Republicans are trying to use the debate over the fiscal 2014 budget to defund Obamacare. President Barack Obama has said that defunding Obamacare is not negotiable. The worry is that Republicans will say the same of the debt-ceiling debate.

The Treasury Department has said it will not be able to pay all of its bills starting around Oct. 17 unless the debt ceiling is raised. It's worrisome that Congress is waiting until the last minute on the budget debate and hasn't even started talking about raising the ceiling. Since 1939, when Congress stopped having to approve each individual debt issuance, the debt ceiling has been raised 99 times.

Bills Treasury might not be able to pay in a matter of weeks include interest on Treasury bonds, Social Security checks, and Medicare payments. This would have a large negative effect on GDP and would cause mayhem in the world financial markets, as Treasury bonds have traditionally been considered risk-free assets -- safe havens for investors that can be used as collateral in many transactions. Many financial institutions have rules that do not allow them to use securities that are in default for collateral, but the U.S. would be in default if it stops making interest payments. This risks the financial leadership of the U.S. and world economic growth.

I believe it will come down to the wire but that Congress will not risk economic collapse and will raise the debt ceiling. If you want to learn more about our national debt, you should grab a copy of the Motley Fool's new free report, "Everything You Need to Know About the National Debt." The report walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!

 


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  • Report this Comment On September 30, 2013, at 3:53 PM, monkota wrote:

    Raising the debt ceiling would raise havoc with any institution, person, investor or company who is depending on government finance.

    However, this also shows why we need to balance the federal budget.This can only be accomplished by additional taxation or decreased government spending.

    No country can survive if it taxes its citizens into oblivion. Neither can it survive if it continues to spend more than it receives. This appears to be a premier case for less waste and spending by the government, and not basing our economy on continuing inflation.

    Will we ever elect a President and Congress who have the courage and intelligence to repair all the damages that have been done by previous Administrations & Congress? I seriously doubt it!

  • Report this Comment On October 03, 2013, at 1:00 PM, ModelMath wrote:

    All I want is an ordered list of which stocks to dump in the next two weeks. Suggestions?

  • Report this Comment On October 03, 2013, at 3:43 PM, CasualReader wrote:

    Well looks like you were wrong! Market is getting hammered!

  • Report this Comment On October 08, 2013, at 2:08 PM, grantr999 wrote:

    I have no faith that our illustrious representatives in Congress will do their job and take their responsibilities seriously. I asked the company I work with to tell their lobbyists that their customers were fed up with Congress and are beginning to go more conservative with their investments. If it were possible I would convert my holdings to hard currency and move to somewhere more sane.

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