The psychological impact of a potential U.S. government shutdown on already skittish investors is a much greater concern to financial advisers than any actual economic impact.
Most advisers believe that Congress and President Barack Obama will cobble together a plan to keep agencies open when the federal government's new fiscal year begins tomorrow. Even if the political budget wrangling causes some federal worker furloughs, the situation won't affect the economy or the markets long-term, advisers said.
Speculation over the shutdown, however, is creating the type of noise that drives clients crazy.
“You're dealing with investor and market psychology more than anything else,” said Robert Henderson, founder and president of Lansdowne Wealth Management LLC. “It creates tons of headlines, and that, I think, in the short term is the biggest risk.”
Concerns that the budget gridlock will hurt economic growth contributed to the first weekly decline of the S&P 500 since August. The broad-market measure fell 1.1% last week to close at 1691.75.
Many clients haven't gotten over losses they experienced in 2008. They are hesitant to invest and are afraid of another significant market correction, Mr. Henderson said.
Like many financial advisers who have watched the Dow Jones Industrial Average run up about 16% since the beginning of the year, Mr. Henderson has already positioned client portfolios to handle a limited market correction.
Rich Zito, co-founder of Flynn Zito Capital Management LLC, said his clients ask him to build portfolios to “insulate” them from “the craziness in D.C.”
Many of Mr. Zito's clients are tired of politicians' failing to do their job of running the government smoothly.
“Think about all the hype and the fearmongering that went on with the sequester,” he said. “No one is saying, "Jeez, my life is horrible after the sequester.'”
Don't fret, we'll call
Some advisers plan to reach out to clients if a shutdown is imminent.
“We'll call clients to let them know that things could get a little rocky,” said Paul LaViola, co-founder of Foundation Wealth Management LLC, anticipating that equity markets will decline if the government shuts down.
He also plans to tell clients that the firm is going to take “this great opportunity to re-balance portfolios” and buy equities when they drop in price.
Meanwhile, the government continues to prepare to furlough 800,000 federal workers as early as tomorrow.
If the government closes tomorrow, the Securities and Exchange Commission will have to operate with a skeleton staff. Only 252 of the agency's 4,149 employees will remain on the job, according to the plan of operations the SEC received from the Office of Management and Budget last Friday.
During a shutdown, the SEC can continue to handle emergency enforcement matters and monitor its system for receiving tips and complaints. It also would monitor market activity and keep its company and individual filing system running, among other activities.
The SEC would have to halt litigation and stop investigations. It wouldn't conduct non-emergency rule making, issue no-action letters or consider exemptive relief.
It also wouldn't approve applications for new financial products or conduct routine oversight of the Financial Industry Regulatory Authority Inc. or other self-regulatory organizations.
A shutdown wouldn't be un-precedented: 17 funding gaps happened between 1977 and 1996, based on a Congressional Research Service analysis.
In 1995, interruptions lasted from Nov. 14 to Nov. 19 and from Dec. 16 to Jan. 6, 1996, as Republicans led by then-House Speaker Newt Gingrich clashed with President Bill Clinton's administration.
Mark Schoeff Jr. and Trevor Hunnicutt contributed to this story.