On April 28, the current funding agreement for the federal government expires. Right now, there is no agreement working through Congress to replace the current one.
That leaves many investors asking, "Will the government shut down?"
Here's everything investors need to know about a looming government shutdown, including a way to book market-beating gains when other investors are panicking...
A government shutdown occurs when there is a "funding gap." That refers to when Congress has not passed either a budget or a spending bill to allow the funding of government agencies and operations.
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This is due to a law passed in 1921 that mandates the government must have a budget or spending bill in place in order for government activities to be funded. That means once the current bill expires, there are no funding allocations for the government.
To make matters worse, the deeply divided Congress is currently on recess until Friday (April 21). So there will only be one week to come to an agreement in order to prevent the government from shutting down.
Hot topics being debated by Congress include Obamacare payments, sanctuary cities, the border wall (and border security as a whole), and defense spending. All of these talks not only have to overcome the division along party lines, but also the in-fighting of the Republican Party.
Moderates in both parties are not likely to vote to suspend Obamacare payments or fund the border wall. If these controversial measures are included in the bill, it is unlikely the spending bill will be passed before the April 28 deadline.
That dramatically increases the odds the government will shut down April 28. And this is only the first of two times the government is likely to shut down this year...
The media is not giving this potential shutdown on April 28 the attention it deserves, meaning the markets are not fully prepared. And the April 28 shutdown may not be the only government shutdown we see this year...
In order to prevent a second government shutdown in 2017, Congress must pass a budget for the next fiscal year. The government's fiscal year begins Oct. 1. That means Congress has only one month to finish negotiations about the budget when they return from the three-month summer recess.
If history is any indication, the markets will take a hit this year.
The last three shutdowns over spending resulted in dips in the market.
The markets don't like surprises, and right now they don't see either of the government shutdowns coming. That is bad news for investors.
But for our readers, a government shutdown could result in the biggest moneymaking opportunity of the year...
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The buying opportunities that occur during times of market volatility should assuage some of the concerns investors have ahead of a possible government shutdown.
That may sound a little far-fetched, but let me explain.
When the government shuts down, the markets drop in a panic. However, those companies aren't any less valuable than they were the day before. The drop in price that happens is just a great buying opportunity that will allow you to net profits as the markets normalize when the government reopens.
The best strategy to implement ahead of a government shutdown is to place lowball orders.
Lowball orders are orders you put in with your broker to buy a certain stock at a certain price (below the current market price). When the stock hits your target price, your buy order will automatically be placed.
Lowball orders allow you to get into a good company at a discount without having to watch the price.
Money Morning Chief Investment Strategist Keith Fitz-Gerald recommends selecting companies in the defense sector (you can view his specific recommendations here). The defense sector will likely be hit harder than the markets in general during a government shutdown because it relies on government spending for revenue.
This means you can get companies like Raytheon Co. (NYSE: RTN) and Northrop Grumman Corp. (NYSE: NOC) at a steeper discount than the general market, which will lead to bigger profits as the markets return to normal.
For example, Raytheon is currently trading at $152.82 a share. If a government shutdown causes the stock to drop 10%, you can buy this growing defense company at $137.54. When the government reopens, Raytheon will likely rebound to at least $152 a share. That will give you 10% profits in a matter of days, plus you now own a company that has posted earnings per share of at least $1.43 for each of the last four quarters.
The Bottom Line: While the markets will drop amid a government shutdown, losses won't last long if you pick companies with strong long-term earning potential.
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