The S&P 500 is down less than 1% on uncertainty related to a possible federal government shutdown. The VIX is up roughly 11% to about 17. A less than 1% stock move and 11% VIX increase is a subdued response to a potential shutdown. Either investors believe the chances the government actually shuts down for a meaningful amount of time is low or a government shutdown might actually be beneficial as it could begin a process of spending reduction.
As the economy gains strength, the short-term influence of the federal government on economic growth diminishes. Longer-term, we believe the markets will respond favorably if government spending migrates toward more sustainable levels. Oddly enough, the current budget battle might be a Win – Win situation for stock investors. If a shutdown is averted, stocks will rebound in the short-term. If a shutdown occurs, investors may buy the dip as they gain confidence real reform may be implemented in Washington.