As long as it's resolved quickly, the government shutdown won't hurt portfolios, advisers reassured worried clients last week.
“A government shutdown sounds like a scary thing, but we're telling clients that if it's resolved soon, then it's a nonissue,” said Gerard Klingman, president of Klingman & Associates LLC. He added, however, that if the stalemate continues beyond a week or two, the markets will react negatively.
The Dow Jones Industrial Average had a fairly benign reaction to the first four days of the government closure, but advisers expect to see increased volatility the longer it lasts.
Mr. Klingman said clients across the political spectrum are “exasperated with Washington” and that the longer the shutdown goes on, the worse it will be for consumer and business confidence.
Before the current closure, the government shut down in 1995 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.
“Most people anticipate that it will not last real long, that someone will come to their senses and do whatever back-office deal that needs to be done,” said Norman Berk, founder of Berk Cleveland Rathmell Wealth Strategies LLC. “But if the fight over Obamacare becomes part of the debt ceiling debate and they don't raise the debt ceiling, there is a potential to be cataclysmic.”
The deadline for raising the debt ceiling is Oct. 17. Experts agree that defaulting on the country's debt would be more damaging to the economy than a short government shutdown.
But even a government shutdown of a few days has some impact on investor confidence and potentially the economy, Mr. Berk said.
“If you were about to buy a house or a car, would you? I wouldn't,” he said.
In a mass e-mail to clients and other firm contacts last Monday night, hours before the shutdown took effect, Mr. Berk wrote: “The direct immediate impact to most of us will be limited. If the shutdown continues for a longer period — the shutdown in 1995-96 lasted 21 days — the impact will get progressively worse as the toll of not having government workers working will permeate through the economy.”
Most advisers agree that this event is important enough to demand communication with clients.
“Anything like this and you have to be in communication with clients, even if you don't know the end result,” Mr. Klingman said.
Meanwhile, financial advisers with clients who are furloughed federal employees are trying to ease their concerns about cash and reminding them of their rainy-day funds.
“Nobody's panicked yet,” said Jessica Ness, a client adviser and director of financial planning at Glassman Wealth Services. “But they are irritated and confused about why [Congress] can't reach a resolution.”
Federal employees and contractors make up about 30% of the McLean, Va.-based firm's client base.
One worry for clients is how much access they have to cash, as they face going without a paycheck. Ms. Ness has tried to reassure them on that point.
“The big conversation is revolving around the basics: "This is what your rainy-day fund is for,'” Ms. Ness said. “It's what we do — hand-hold during these short-term bumps and jumps, and return their perspective to the long-term view.”
John Olson, an Annapolis, Md. financial adviser with First Command Financial Services Inc., said he hasn't heard from any clients yet, but he expects to if the furlough lasts more than a week. About 10% of his clients are federal employees and 70% are military families. Those on active military duty will continue to be paid.
“I try to build a financial plan so that if this does happen, they can weather it for a time,” Mr. Olson said. “That includes building an emergency fund with three to six months of expenses.”
If the furloughs last two or three weeks, he will talk with those clients about where to trim spending and where they can reduce funding in college savings accounts, general investment accounts and then retirement accounts, in that order, he said.
First Command has pledged to continue giving direct-deposit pay loans to its military and federal employee banking clients who have been furloughed. The firm essentially would give them a zero-interest payroll advance loan that would be equal to the client's expected direct deposit.
“We are committed to doing all we can to ensure that our clients are not financially harmed by government actions — or inactions — that are beyond their control,” said Scott Spiker, chief executive of First Command.
About 800,000 federal workers have been furloughed and won't be paid by the government for this missed time unless Congress agrees to make them whole, which it has done for those furloughed in the past. U.S. government employees considered “essential” are working, but they won't be issued payments for that work until after the shutdown is over.