October Plus Shutdowns And The Debt Ceiling Equals More Volatility

The Pending Government Shutdown

Upcoming Congressional debates on the U.S. budget and debt ceiling may cause an increase in volatility in global markets over the next few weeks.

Next week's potential government shutdown is becoming more likely. While past shutdowns have not had a major impact on U.S. equity markets, the combination of a shutdown and debt ceiling limits may give investors a reason to realize year-to-date gains in their portfolios by reducing their exposure to equities.

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The Debt Ceiling Is The Big Concern

In 2011, the S&P 500 dropped 20% in just a few days after the debt ceiling debate caused credit agencies to downgrade U.S. debt.

While another downgrade is not anticipated, the notion that it did happen in 2011 may cause investors to be a bit more cautious this time around.

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Extraordinary measures have already taken place since the debt ceiling was reached earlier this year. However, these measures have almost been exhausted and Treasury Secretary Jack Lew has stated that October 17 is the deadline when the U.S. will officially run out of cash.

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Volatility is slowly rising, and may rise rapidly as we near the October 17 deadline.

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If market volatility continues to rise, aggressive traders will be looking to take profits from their portfolios.

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Portfolio margin use is still at very high levels, and a large decline in stock prices could easily wipe out year-to-date gains in these portfolios, something aggressive traders may not be willing to risk this late in the year.