How vulnerable is your stock portfolio if the fiscal brinkmanship in Washington spins out of control?It's tough to quantify the downside risk with precision, given the unknown outcome of the current …
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How vulnerable is your stock portfolio if the fiscal brinkmanship in Washington spins out of control?It's tough to quantify the downside risk with precision, given the unknown outcome of the current congressional budget fight. Investors don't know if lawmakers will agree to fund the government beyond Sept. 30, or Monday, and avoid a shutdown.It's also unclear if Congress will raise the debt ceiling in mid-October before the U.S. runs out of cash to pay its bills - a deal needed to avoid the nation's first-ever default.But history can serve as a guide. A look back at how the stock market reacted to past budget-related brawls in Congress provides a useful template, or road map, as to how trading might play out this time, and how much financial pain investors might endure.Investor nervousness is on the rise, witnessed by the price action of the Dow Jones industrial average, which is trading down Friday and is on track for its sixth losing session in the past seven trading days.Wall Street cites three prior episodes of fiscal brinkmanship dating back to 1995 that offer a glimpse into the way the market prices in this type of political risk.First, let's quickly outline the risks of the current fiscal saber rattling. The base case, or the Wall Street consensus, is that Congress avoids a government shutdown and a default.But if a shutdown occurs, it's not likely to cause much long-term damage to the economy or stocks unless it drags on for weeks or more, which is unlikely. Each week the government is shut down, quarterly economic growth will be reduced by just 0.1 percentage points, according to Michael Gapen and Michael Gavin of Barclays.Not raising the debt ceiling, however, would likely be "far more destabilizing," they say. It would require an immediate cut in government spending equal to more than 4% of GDP, or comparable in size to the "fiscal cliff" hit. But spending cuts would not rule out a default. In this more bearish scenario a recession is possible, as are "significant disruptions" in markets.Wallstreet Nervous Over Shutdown