Why It's a Dangerous Time to Be a Stock Market Investor

Well, as expected, the Democrats and the Republicans failed to get along and resolve their differences—except this time their bickering has caused an actual shutdown of the government.

What happened? The deal for more funding fell apart. The government then ordered a partial shutdown of some of its non-essential services, as there is no money left in the coffers. In the end, America is broke.

Now, the reality is simple: the government needs funds and quick.

What happened is the government and Federal Reserve essentially paid for the economic renewal via record-low interest rates and easy money flowing into the economy.

The problem right now lies in the length and broadness of the government shutdown. And to make matters worse, should the two parties fail to come up with a resolution before the debt ceiling deadline on October 17, things could get downright ugly.

It’s a reality that seems to be stuck on repeat: America is broke and needs to borrow again.

The $16.7 trillion in national debt was not enough, and more money is needed. However, the negotiations on increasing the debt ceiling will largely depend on coming to a resolution now only on funding, but more specifically, on Obamacare. If the Obama administration refuses to be flexible enough to gain approval in the House, then the debt ceiling discussions could be a mess.

The end result could be a lengthier and broader government shutdown that could very well result in a downgrade of the country’s credit rating. Failing to up the debt ceiling will mean the government will lack the funds to pay debt holders, which would result in a potential default.

Recall what happened in 2011, when the last shutdown occurred after talks on raising the debt ceiling failed. The shutdown led to a downgrade of U.S. debt and a 17% correction in the S&P 500.

The same thing could happen now. The two parties appear to be miles apart in what they are seeking. The failure to raise the debt ceiling will impact the economy and the U.S. debt rating. The effects will be felt in the stock market, so expect sustained losses.

As we move into next week, you will need to be careful and not get caught unprepared. If the discussions towards the debt ceiling look to be failing—and you will be able to tell based on their current debating over funding and Obamacare—then you should start to cut your holdings in the stock market in the event of a stock market correction like we saw in 2011.

This article Why It’s a Dangerous Time to Be a Stock Market Investor was originally published at Investment Contrarians