David Hillier, senior US economist at Aviva Investors, believes that a resolution will be found in late October to early November, but any tapering of QE is unlikely to happen until January as a result.
Taper then grow
"The Federal Reserve’s concern about fiscal policy will not be assuaged until it meets in December. By that time, it should be clear that the housing market and wider economy has not taken a significant hit from higher market interest rates, so we would expect it to start scaling back bond purchases either then, or at its January meeting."
In this scenario, Hillier says that the US economy is likely to continue to expand at an annualised rate of 2% to 2.25% between late 2013 and the end of 2014, with growth then picking up to around 2.75% in 2015.
Hillier says the current impasse in Washington is unlikely to have a long-lasting impact on financial markets, though there may be volatility in the short-term: "(It) implies little or no lasting damage to the economy, asset prices should emerge from this episode relatively unscathed."
James Butterfill, global equity strategist at Coutts, points out that there have been 17 previous government closures, predominantly in the ’70s and ‘80s and typically lasting seven days, during which there was an average decline of 1.8% in the S&P 500 over the 20-day period from when the shutters went down.
He adds: "Performance varied significantly depending on the length of the shutdown – for those lasting less than five days, shares actually gained an average of 3.3% over the 20 days after the shutdown, whereas they fell on average 2.9% over the 20-day period for shutdowns that lasted more than eight days."
Debt ceiling rises above shutdown
Butterfill says that while most shutdowns over the past two decades have lasted less than five days, the longer the shutdown lasts, the worse it will be for US equities. He remains underweight the US market.
Russ Koesterich, chief investment strategist for BlackRock, says that the battle over the debt ceiling is a more important issue than the government shutdown and a more significant potential risk.
He says: "Ultimately, we believe Congress and the President will be able to come to an agreement to raise the debt ceiling, but if they fail to do so, it would have dire economic and financial market consequences. Investors should expect more volatility in the near term. While some investors have been becoming more defensive in this environment, for those with longer time horizons this volatility could represent a buying opportunity."
Jason Hollands, managing director – business development and communications at Bestinvest, says investors should not lose sight of fundamentals while the attention is focused on politics: "In this respect US stocks simply look pricey, with earnings having arguably peaked. We are therefore in a period where US stocks are vulnerable to a correction."
