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Mark Hulbert
Jan. 7, 2011, 12:01 a.m. EST
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By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” I'm not a Pollyanna "” not by a long shot.
But when lots of investors become gripped by the same nightmare scenario, my contrarian instincts kick into gear, leading me to explore the possibility that things might not be as bad as they otherwise seem.
Take the nightmare du jour that is spooking lots of investors: The prospect of a government shutdown later this year, due to the increasingly likely possibility that political gridlock in Washington will result in failing to raise the federal government's debt ceiling.
I must admit that the prospects of a government shutdown and/or defaulting on its debt seem scary. But would they actually lead to a stock market crash, as many are now worrying that it will?
And while no one knows for sure, it is worth remembering that we've been down this road before. Remember the government budget crisis in 1995, which followed the 1994 midterm elections in which the Republican party won control of both the House and the Senate? That crisis led to not one, but two separate government shutdowns "” one in mid November 1995 and the other from mid-December 1995 through early January 1996 (see chart).
And yet, far from crashing, the stock market performed quite well, thank you. The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 11,697, -25.58, -0.22%) was trading around 3,800 on the day of the 1994 mid-term elections, for example. When the first government shutdown began in mid-November 1995, the Dow was trading around 4,900.
And during that and the subsequent shutdown, the Dow gained several percent more.
These results don't guarantee that we will have as happy an outcome this time around, of course. But they are a helpful antidote to those who worry that such a shutdown would necessarily be bad news for the market.
Nor should these results be interpreted to mean that the market doesn't care about a government shutdown. It undoubtedly does. Instead, these results are a good illustration of the impressive job the markets do of discounting the future.
In 1995, for example, the government shutdowns did not come as a complete surprise. After all, the process that led to those shutdowns was set in motion at least a year earlier with the midterm elections. And, as 1995 wore on, the increasing political gridlock in Washington made the probability of such a shutdown become more and more likely.
The market gradually took this increasing likelihood into account in the months leading up to the shutdown. And, as a result, the shutdown itself was a non-event as far as stocks were concerned.
The same discounting process has already started this time around as well. One of the things that spooked the market earlier this week, for example, was Treasury Secretary Tim Geithner's announcement that the current debt ceiling could be hit as early as March 31. (Read full story on Geithner's debt-ceiling comments.)
What the market cannot discount are things that are truly unexpected and unanticipated. Hitting the debt ceiling, and political gridlock in responding to that, do not fit into this category.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
A possible Facebook IPO could likely have other hot tech companies in Silicon Valley and beyond looking at going public next.
6:35 p.m. Jan. 6, 2011
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