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5 Ways a Government Shutdown Could Negatively Impact Your Portfolio

By Sean Williams - Sep 25, 2013 at 10:00AM

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With the threat looming again of a government shutdown, we take a look at five ways investors may struggle in the short term.

Here's a real shocker (and please stop me if you've heard this before): We're less than one week away from a potential government shutdown on Oct. 1 because Republicans and Democrats can't meet in the middle on the federal budget. Surprised? Shocked? Amazed this is even news anymore with as often as it happens these days?

As irritating as "kick the can" has become in politics these days, ongoing bouts of partisan bickering have depressingly become the norm. Unfortunately, it's also led to the inability to draft an agreed-upon budget to run the various branches of the government or effectively deal with the U.S. debt ceiling, which should be decided on in just a few short weeks as well. These failures on the part of our elected officials have the very real possibility of negatively impacting your portfolio. Here are five ways a government shutdown could have a negative impact on your investments.

No. 1: Federal worker IOUs
I perceive no greater concern to your portfolio than federal workers receiving IOUs instead of paychecks. Now, keep in mind that federal workers include those who work directly for the government in D.C. as well as our members of the armed forces. Last I checked, the vast majority of these individuals had bills they needed to pay, and I know personally that IOUs stopped working as a valid form of payment when I was about eight years old.

Our economy is founded on the principle that consumer spending and consumption will drive growth. If federal workers have nothing but IOUs in their hands, how can we expect the economy to grow? Perhaps deep-discount variety stores could see a boost in business, such as dollar store operator Dollar General, which caters to a very cost-conscious audience with transparent pricing. However, the vast majority of retailers would struggle if this government shutdown extended for any significant length of time. Banks would presumably suffer, too, as loan delinquencies would be expected to rise with only IOUs in the hands of government employees.

No. 2: No federal home loans
If you own banking or homebuilding stocks and need another reason to be concerned about the impending government shutdown, look no further than the end of Federal Housing Administration loans. Not all government agencies will close or lose funding if the government shuts down, but one thing is for sure: Those homebuyers seeking an FHA loan won't be getting one as of Oct. 1 at this rate.

The FHA is a lender that provides mortgage-backed insured loans through FHA-approved lenders that, in turn, protects those lenders in the case of a consumer default. According to Bankrate, FHA loans now account for about half of all mortgage loans compared to just 3% a few years prior thanks to lower down payment requirements than in previous years. However, if FHA backing were to cease, there's no backstop to protect lenders (i.e., banks) in the event of a default. Wells Fargo (WFC 7.55%) is the perfect case in point, here, as it announced in August that it was going to lay off 2,300 people from its mortgage division and added an additional 1,800 more people to those cuts last week. With mortgage rates rising and the real threat of an FHA shutdown on the horizon, banks are paring their costs ahead of time.

The ceasing of FHA loans is also going to be very bad news for the housing sector, which is already reeling from a 120 basis point increase in interest rates that ultimately sent mortgage originations down by more than 50%! Even though housing prices are up and inventory is under control, if consumers have no access to low down payment FHA loans, and/or banks are unwilling to make the loan for fear of default, the homebuilding sector is going to be in hot water.

No. 3: Missing government data
Want to make smart investing decisions? Good luck doing that blind, because a government shutdown would also mean the shutdown of the U.S. Department of Commerce and Bureau of Labor Statistics. 

The Department of Commerce is responsible for tallying myriad key U.S. indicators including GDP, new residential construction, the durable goods report, and monthly wholesale trade. If the Bureau of Labor Statistics shuts down, you can say goodbye to the monthly jobs report, which gives us detailed clues about the unemployment rate, underemployment rate, and whether full-time or part-time jobs are being created.

We would still have corporate earnings to go off of, but there would be no concrete way to gauge whether the employment situation was improving or worsening -- especially with some government workers on furlough -- or even decipher if the U.S. economy is growing or not. Not to mention that it's a psychological blow to see the U.S. government shut down over nothing more than political bickering!

No. 4: New drug delays
If you think the hits will be coming strictly from the housing, financial, and retail sectors, then you have another thing coming. Although we've received no official word from the Food and Drug Administration with regard to what would happen if the government were to shut down, chances are its employees would be furloughed, and all drugs under review would come to a grinding halt. During the 1995-1996 government shutdown, the FDA was one of the few government agencies that retained funding, but that may not be the case this time around. 

How might that affect your portfolio? The main concern would be for companies that have a scheduled meeting with the FDA panel or an upcoming PDUFA date. Amarin (AMRN -3.52%), for instance, is scheduled to meet with the FDA's panel on Oct. 16 to discuss its supplemental new drug application for Vascepa to treat patients with high triglyceride levels (200 mg/DL to 499 mg/DL) with mixed dyslipidemia. Amarin and its shareholders are very eager for this meeting as it would expand Vascepa's potential target audience dramatically. If the government shuts down, this meeting is likely to be pushed down the road. 

Similarly, GlaxoSmithKline and Theravance (NASDAQ: THRX) have a revolutionary inhaler to treat COPD known as Anoro Ellipta with a PDUFA date of Dec. 18 (i.e., a date where the FDA either approves or rejects the drug or device in question). Just two weeks earlier, the FDA panel voted in favor of recommending Anoro Ellipta for approval by a vote of 11-2, noting that its safety and efficacy data demonstrated substantial evidence for approval as a once-daily, long-term maintenance bronchodilator therapy. Like Amarin, there will be no PDUFA date if the government shuts down. This would be bad news for biopharmaceutical companies and the patients who need these therapies.

No. 5: Holster that firearm
Finally -- and certain to be one of the more controversial aspects of the impending government shutdown -- the Alcohol, Tobacco, and Firearms agency would close its doors and stop issuing gun permits. For those socially conscious investors, this won't be a big deal at all. For the remainder of you who own Sturm, Ruger (RGR 2.72%) or Smith & Wesson (SWBI 14.49%), it could potentially be a big problem.

If you recall, when President Obama's administration tinkered with the idea of enacting new gun control measures, profits for both gun makers soared as the potential for long permit delays and extensive background checks brought on-the-fence gun buyers into stores like never before. We could see a similar scenario here over the next week with gun sales soaring in anticipation of a permit issue shutdown. Overall, though, sales for both gun manufacturers would be expected to slump dramatically with no new permits being issued. Following next week, I would expect backlogs to pile up and sales to fall off rapidly.

What to do
Historically speaking, the threat of a government shutdown has loomed many times with follow-through lacking most of the time. Although it's an unpleasant short-term tangent, I would suggest doing your best to not allow the political chatter to affect your long-term investing thesis. In other words, the reasoning behind your stock purchases hasn't changed from week to week just because Democrats and Republicans can't be friends. Stick to your strategy and you should be rewarded over the long run.

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Amarin Corporation plc
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Smith & Wesson Brands, Inc. Stock Quote
Smith & Wesson Brands, Inc.
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