A short-term solution for funding

The measure, which passed in the early hours of February 9 and was signed into law by President Trump, includes a massive budget deal that lifts spending caps by $300 billion over 2 years. The vote buys Congress time to pass an omnibus spending bill in March. That bill would keep the government running for the rest of the fiscal year, which ends September 30.

The government has been operating under temporary measures to fund discretionary spending programs, such as the National Park Service and many federal education and transportation programs. Those measures briefly expired at midnight on February 8.

A prolonged government shutdown might have provoked some short-term disruption to the markets but probably would have been less consequential in the long run. In the past, when a government shutdown lasted more than 5 days, the average return during the event was –0.94%. Average returns for the 12-month period after the shutdown, however, were 10.77%.

The measure also allows the government to raise the debt ceiling, which is a congressionally mandated limit on the amount of public debt the Treasury can incur. The debt ceiling could have been a serious issue had action not been taken by early March. A near delay in addressing the debt ceiling in 2011 resulted in the first-ever downgrade in the nation’s credit rating and a sharp drop in the stock market.

How to handle market volatility

The volatility in the markets that began February 2 doesn’t appear to be connected to fear about a potential government shutdown or the debt ceiling, but rather about concern over inflation and future interest rate increases.

“Regardless of what creates market volatility, if you remain disciplined, globally diversified, and patient, you should be rewarded with fair inflation-adjusted returns in the longer term,” said Roger Aliaga-Diaz, Vanguard’s chief economist for the Americas.

“Vanguard’s 5- and 10-year asset-return expectations are mostly unaffected by potential short-term market responses to these situations,” Aliaga-Diaz said.


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