What Does the Federal Shutdown Mean for the Markets?

Elaine Garzarelli advises investors on market impact - and lessons from previous shutdowns

Oct 02, 2013, 13:25 ET from Garzarelli Capital, Inc.

NEW YORK, Oct. 2, 2013 /PRNewswire/ -- As investors watch the super-charged budget battle in D.C., veteran market expert and economist Elaine Garzarelli advises that the shutdown will essentially be a "non-event" for the markets.

"This has happened so many times before that the shutdown will not have much of a bearing at all," says Dr. Garzarelli, who heads Garzarelli Capital, Inc., and has advised investors for 30 years using a mathematical approach to market timing and sector analysis. "Over the last 20 years there have been 12 government shutdowns ranging from one day to 28 days, with the average being 9 days. The market has fallen prior to previous shutdowns, but then rallied for months thereafter."

As creator of the proprietary "12 stock market indicator model," which has allowed her to predict not only market direction but which sectors would outperform the market, Dr. Garzarelli has been widely recognized for her correct predictions of all major market trends for 30 years. Her track record earned her first team in Quantitative Research in Institutional Investor magazine's All-Star poll for 11 years. She works closely with other economists each month to evaluate the fundamentals of the industries she covers – including, among others, health care, information technology, industrials, and financials.

Rate impact from "flight to safety"
"Looking at the most recent shutdowns from 1995 and 2011, 10-year treasury yields fell 100 basis points from three months before the crisis to two months after," she explains. "So far, the yield is down 40 basis points from its September peak. We believe 35 basis points are due to the shutdown – the 'flight to safety' – and 5 basis points are due to the non-tapering by the Fed. The 10-year treasury yield may fall another 30 basis points in a flight to safety.

"Longer-term, these falling rates are good for housing, good for the stock market, and good for capital spending."

GDP and debt rating effect – minimal
The effect on GDP growth will be minimal, she argues: "We see the government shutdown reducing real GDP growth by .1% to .2 % per week, and the reality is that no one is going to keep the government shut down for too long."

Additionally, she says that U.S. debt ratings will not change: "The current debt ceiling debate is unlikely to change the S&P's double A-plus rating on U.S. sovereign debt." 

The 4 things that move stocks
Looking at what really matters in stock performance, it's not the heated battle of the egos in Congress, she explains. Instead, it is a focus on the fundamentals.

The Garzarelli methodology incorporates multiple indicators, which fluctuate each year. "Everything from more international exposure to social media to money supply affects the state of play," she explains.

"But what is clear from research is that there are four key things that move stock prices up and down." These are:

  1. Valuation – Is the market over- or undervalued based on interest rates and earnings?
  2. Monetary policy – Whether the Fed is easing or tightening, and the shape of the yield curve.
  3. Economic cycle – Economic momentum from industrial production and leading economic indicators.
  4. Sentiment – Number of bullish and bearish advisors, which is a contrary indicator.

"Ultimately, the bull market remains intact, and corrections will be limited to 4% to 7%."

To speak with Elaine Garzarelli, please contact Davia Temin or Suzanne Oaks of Temin and Company at 212-588-8788 or news@temin.co.

About Elaine Garzarelli
Dr. Garzarelli is president of Garzarelli Capital, Inc. She was a partner and managing director at Lehman Brothers prior to starting her own company in 1995. She has been studying the stock market for over 30 years and was ranked first team in Quantitative Research in Institutional Investor magazine's All-Star poll for 11 years; she was also top ranked in Portfolio Strategy and Market Timing.

She initially developed her Sector Analysis methodology for predicting industry earnings and her 12 stock market indicator model while working as a corporate profit economist at a major brokerage firm. This methodology allowed her to predict the major trends in stock prices and the earnings of 80 S&P 500 industry groups.

Dr. Garzarelli currently uses this mathematical approach for stock market timing and industry selection in producing her Sector Analysis monthly report. She issues this report to institutions, primarily portfolio managers and security analysts. Her clients include domestic and international mutual and pension funds, and hedge funds.

She was featured as a top businessperson in Fortune magazine and was listed in Business Week's "What's In" list. She appears on television including Fox Business News, CNBC, and The Nightly Business Report on PBS. Elaine spends each month doing research by working with economists in the industries she covers and analyzing the economy. Her education is in economics and statistics at New York University, and she holds a doctorate from Drexel University. Dr. Garzarelli has a scholarship fund at Drexel University for female undergraduate students in the Bennett S. LeBow College of Business.

SOURCE Garzarelli Capital, Inc.