Can you profit from the US government shutdown?

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Despite a last minute appeal by President Obama, the right fringe of the Republican Party has succeeded in causing some actual damage to the US economy. The White House’s budget office has begun notifying federal agencies that they must begin an orderly shutdown. On top of that, on 17 October, the US government will need to raise the debt ceiling again.

The government shutdown means that federal employees in roles deemed not to be essential will be forced to take unpaid leave. For example, many of employees at NASA will not be required, and National Park Visitor Center employees will be told not to come in to work. Ironically, while many government employees face losing their paycheque, the hard-right members of Congress who have caused this situation will continue to be paid.

During the last US government shutdowns (from early December 1995 to early January 1996) the ASX All Ordinaries (ASX:XAO) continued on an upward trajectory. The consensus is that if the shutdown only lasts a few days, then it will not be a major issue. However, if the shutdown drags on, it threatens to make a noticeable impact on American GNP. Fear will mount the longer the situation persists.

The fact that the Republicans were happy to cause the government shutdown suggests that they will also refuse to lift the debt ceiling until the last minute. These two events will likely converge to take the heat out of US equity markets, which are nearing historic highs. As Alan Kohler wrote for Business Spectator, “Markets clearly don’t know whether to be afraid, very afraid or petrified, and have so far settled for afraid…”

I’m not planning on selling shares because of the political mess in the USA. However, if markets sentiment shifts to very afraid, or better yet, petrified, this might give Australian investors a chance to buy blue-chip companies for a reasonable price. Equally, investors should be careful not to get caught up in panic and sell their shares.

In this scenario, companies exposed to the US economy, such as QBE Insurance (QBE.AX), might be available at an attractive price. Indeed, QBE shares are down about 15% since August, and would represent a good buying opportunity were they to get much lower.

Another blue-chip company that is exposed to the US economy is Cochlear (COH.AX). As with QBE, Cochlear has underperformed the market recently, and some analysts believe it is losing its competitive edge. However, were markets to react negatively to the US government shutdown and the looming debt ceiling, Cochlear might be offered at a bargain price.

Should market jitters be confined to the US markets, Australian investors may wish to consider wading in. Although it is more difficult to invest in overseas markets, certain American companies are without rival. For example, Google (GOOG) has one of the most valuable brands in the world and wields enormous power. It makes sense to me to consider buying shares in such a company during market-wide downturns.

Foolish takeaway

Market volatility is the friend of the long term investor. While markets are efficient most of the time, investors make money when they spot (and act on) market inefficiencies. While blue-chip companies have their advantages, smaller companies are often available at even better prices. Buying stocks when they are attractively priced reduces the risk of investing.

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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.

Market Data

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