Will the Stock Market Crash During a Government Shutdown?

The government's funding runs out Friday (April 28), and without congressional action, there will be a government shutdown. With the Dow flattening as the Trump rally fizzles, investors are wondering, "Will the stock market crash during a government shutdown?"

will the stock market crash during a government shutdown

And investors are right to wonder. A market crash in 2017 is a serious possibility if Congress can't come to a funding agreement this week. The combination of overvalued stock prices with a destabilizing event like a government shutdown could lead to a massive sell-off.

That's why we're going to show you how to protect your money during a stock market crash and why a government shutdown can cause one...

Will There Be a Stock Market Crash?

The reason a destabilizing event like a government shutdown could cause the next stock market crash is that stocks are perilously high.

One of the biggest reasons behind historic stock market crashes has been extreme overvaluation, or a stock market bubble. The market rises far above the realistic value of its underlying assets.

Take the stock market crash of 1929, for example. The Dow soared over 300% between 1923 and 1929 due to a frenzy of speculation. People believed the stock market could only go up, and they took risks buying stocks. Amateur investors even borrowed over $120 billion to put into the stock market.

While this sort of speculation helped push stock prices higher, it wouldn't last forever.

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On Black Tuesday, Sept. 29, 1929, the market crashed. Because investors couldn't afford any losses, they sold immediately, sending stocks into a death spiral. The Dow lost 86% of its value between 1929 and 1936.

Similarly, the stock market crash of 2008 was the result of speculation driving up prices.

Housing prices doubled in the decade between 1996 and 2006. This again led to risky investing behavior, which further pushed up prices. As long as housing prices rose, people were willing to buy more expensive houses than they could afford and simply refinance later, after their home values inflated. Banks were more than willing to lend to anyone, even unqualified borrowers.

And Wall Street packaged up these mortgages and treated them like grade-A investments. But when the housing market faltered and foreclosures began to rise, Wall Street had no back-up plan. The stock market crashed.

Today, we are seeing similar signs of speculation pushing stock prices higher.

Low interest rates have made borrowing money cheap and easy, and corporations have used the cheap money to buy up shares of their own stock.

The Fed slashed interest rates from over 5% to 0.25% in 2008 to combat the recession brought on by the 2008 stock market crash. They cut rates in hopes companies would use the cheap money to expand their businesses and grow the economy.

Instead, public companies have used the easy money to buy back their own stock. Since 2008, public companies have borrowed $1.9 trillion while they purchased $2.1 trillion of their own stock.

That's pushed stock prices higher, and to valuations that are historically high.

The Shiller price/earnings (PE) ratio stands 74% above its historical average at 29.11. That's even higher than it was before the market crash in 2008, when it hit 27.4. That means stocks are valued even higher than the last stock market crash.

But the era of low interest rates is ending. The Fed has hiked interest rates three times in the last two years, and could raise rates twice more this year. That means as cheap money dries up, stocks might flatten.

And an event that raises investor uncertainty could end with a 2017 stock market crash...

Why a Government Shutdown Can Cause a Stock Market Crash in 2017

The potential government shutdown this week could create enough uncertainty with investors that a massive sell-off crashes the stock market. In fact, past government shutdown battles have seen stock prices fall dramatically. And now that stocks are at historically high values, a government shutdown could make the downturn even worse.

Past government shutdowns fights saw stocks fall. During the 2011 fight over the debt ceiling, the Dow fell 10% between July and August. During the 2013 shutdown, the Dow dropped 2.5% in the last week of September. And during the battle in 2015, the Dow dipped 6% during the second half of August.

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While even a 10% drop wouldn't constitute a stock market crash, things are different now. As we mentioned above, stocks have gained 13% since Election Day as investor optimism about a Trump presidency grew. And with stocks at such overvalued levels, the instability of a government shutdown could be enough to crash the markets.

With the Republican-controlled Congress unable to pass its major healthcare bill, their ability to come to an agreement on an issue as thorny as the budget is in doubt. On top of that, they only have until Friday to hammer out an agreement.

And that's why investors need to be prepared. But Money Morning is here to help. We've got a strategy to protect your money from a stock market crash...

Our Stock Market Crash Protection Plan

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No one can ever predict the timing of a stock market crash, even if we are planning for one. That's why it doesn't make sense to panic and sell stocks. It's unlikely you'll time your exit right, and if you do, it's nearly impossible to know when to buy back in.

That's why Money Morning Chief Investment Strategist Keith Fitz-Gerald thinks investors should hold on to stocks in the "Unstoppable Trends." The Unstoppable Trends are the industries in health, technology, war, energy, demographics, and scarcity. These sectors are always in demand, and they aren't going to fall out of fashion during a downturn.

And by owning well-run companies in these Unstoppable Trends, you can secure resilient stocks that will charge out of any market downturn, leaving behind anyone who sold off stocks for other assets.

That's why we've put together a couple of our favorite stocks from the Unstoppable Trends.

First, Raytheon Co. (NYSE: RTN) is a leading defense contractor. As a defense firm, RTN benefits from the Unstoppable Trend of war, which, however unpleasant the fact may be, will always be an issue. Raytheon has billions of dollars in contracts with the U.S. government, and it's well diversified with foreign governments, too. Roughly 40% of its accounts are overseas.

Raytheon now handles everything from cyberwar to weapons systems, like the tomahawk cruise missiles recently fired at an airbase in Syria. That means no matter what happens to the economy or the stock market, Raytheon is going to bounce back strongly.

Second, Microsoft Corp. (Nasdaq: MSFT) is one of our favorites in the Unstoppable Trend of technology. Technology is simply a part of life across the world now. It connects businesses and people, and the global economy wouldn't function without it.

And Microsoft is a key leader in the tech trend. We like Microsoft because this isn't a startup company with a gimmicky business model. It's a proven leader with serious reach. And now Microsoft is expanding into the growing cloud computing sector. Its Azure cloud service is now the second-largest cloud computing service in the world. Not only that, but Microsoft makes the software many users need to access the cloud. That means it's going to be growing, even if the market dives.

Third, Becton Dickinson and Co. (NYSE: BDX) is primed to benefit from the Unstoppable Trend of demographics. You see, BDX is a medical supply company that makes everything from lab equipment to daily medical supplies. That means it's able to take advantage of aging populations because older demographics need more healthcare.

And in the developing world, populations are growing older, especially as the baby-boom generation passes into retirement age. That means a company like BDX that makes the essential supplies for the healthcare industry will always be growing.

Editor's Note: "Must-have" companies backed by Unstoppable Trends are a cornerstone of Keith's wealth-building strategy. But there's another type of investment he wants Money Morning Members to know about. It's one of his favorites, a kind of "desert island fund" he'd buy if he had to park his money in one place, "retire" from civilization for 20 years, and come back to a pile of money. Click here to learn more...

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