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Stock Trading in a Government Shutdown
Political brinksmanship continues on Capitol Hill and a government shutdown appears eminent. Because volatile markets often promise the best profits we look at stock trading during a government shutdown. Let us look at both how both fundamental and technical analysis can help turn a profit in the coming days. The general consensus is that a temporary shutdown will hurt stocks but not very much. A longer term government shutdown might be a different matter. Failure to raise the government debt ceiling could cause measurable harm to the economy. The economic impact of shutting down the government comes to less than half a percent per month. That figure assumes that a month is the most extreme case before the boys on Capitol Hill grow up and act like leaders. If the debt ceiling is not raised government spending cuts will result in government spending cuts and something on the level of a four percent drop in the Gross Domestic Product. If the US government defaults on its debts all bets are off.
History as a Guide to Stock Trading in a Government Shutdown
When considering stock trading in a government shutdown look at the last time it happened. In the shutdown in the ninety-five to ninety-six fiscal year, the S&P fell nearly four percent but rebounded more than ten percent when the issue was resolved. By the time a deal was achieved to avert a debt default in 2011 the damage was already done and the market had discounted it. The Dow fell nearly fifteen percent and did not recoup those losses until six months later. On the other hand fiscal cliff worries took the Dow down over three percent but a deal resulted in an immediate rally back to the previous level. Using limit orders in day trading is a necessity in this sort of situation. Avoid being pulled into the flood when traders head for the gates. And then remember that when all is resolved there will likely be a nice recovery. Watch market sentiment and remember that in chaotic times a contrarian approach to day trading is often profitable.
Longer Term Trends
To the extent that the current impasse on Capitol Hill is symptom of a dysfunctional government we might expect to see more problems in the weeks, months, and years ahead. Trend following in stock trading can be profitable no matter if the market is going up or down. To the extent that the recurrence of possible debt default hurts the largest economy in the world traders may adopt a negative approach to the market and simply trade the adjustments as the market and the US economy slide into the abyss. At that point traders may choose to trade the US stock market but bank their profits in Yen or Swiss francs. An alternative would be trading and investing in foreign stocks such as the generally advancing markets of Latin America.