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Stock investors remain bullish despite shutdown

Optimism is tempered by fear about next crisis on the horizon

Stock investors stayed optimistic Tuesday in the face of the federal government shutdown, surmising that it would not outlast the week. But they could barely conceal their contempt for Washington lawmakers unable to compromise and perhaps willing to risk further mayhem in the coming weeks.

“It’s potentially bigger than most people think,” said Allen Sinai, chief global economist and strategist at Decision Economics Inc. in New York. “It's not just furloughed workers getting no pay. It’s the uncertainty of what’s going on and what is to come, and a poisonous atmosphere in Washington like I’ve never seen before.’’

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The Dow Jones industrial average rose 62 points, or 0.4 percent, to close at 15,191.70, recovering half its losses suffered Monday ahead of the shutdown. Sinai, like others, is bullish on stocks, but urged caution on putting more money into the market until the shutdown and the federal government’s looming debt ceiling problem are resolved.

“We have a two-part drama in the dysfunctional Washington,’’ Sinai said. The second part is the $16.7 trillion federal debt limit that US Treasury officials say will leave the government unable to borrow more money by Oct. 17. “That is the big fight,’’ according to Sinai.

And for now, it is outweighing concerns about the shutdown. Having stared down numerous fiscal deadlines and crises in recent years, the shutdown seemed to pose fewer long-term risks — as long as it ends quickly.

While 800,000 federal workers going without pay for a week may put a dent in consumer and business confidence, few expect those short-term setbacks to overshadow a generally positive view on stocks, which are up 20 percent this year, and the economy.

Dirk Hofschire, senior vice president of Fidelity Investments’ asset allocation research team in Boston, said he felt the stock market’s reaction was muted because “the stakes are relatively low.”

However, “it’s a whole different story if two weeks from now we’re going through the debt ceiling and we actually start to get worried about whether we’re making payments on our outstanding debt,’’ he said.

Historically, government shutdowns have not done a lot of damage to stocks. The last time around, during the Clinton administration, stocks rose slightly, 0.1 percent, during the 21-day shutdown from Dec. 15, 1995 to Jan. 6, 1996.

But stocks slumped 4.4 percent in an 11-day shutdown under President Carter, which started in September 1979 and ran into the following month.

One thing stocks have going for them in the current environment: There are few other appealing places for average investors to go. Duncan Richardson, chief equity investment officer at Eaton Vance Investment Managers in Boston, said that as interest rates continue to move up, investors are going to experience losses in bonds.

That has helped the stock market remain resilient, he said, along with the Federal Reserve’s decision to keep up its stimulus program by buying bonds. He predicts the shutdown will turn out to be an “inconvenience” that lasts only a handful of days, rather than a serious problem. But Richardson expressed frustration over Republican lawmakers’ unwillingness to move on.

At some point, he said, “you’ve got to accept defeat and not hold the whole economy and the nation hostage.”

There is concern growing in overseas markets as well. Sinai, the economist, said he knew it was bad when an Italian reporter asked him what troubled economies in Europe should think about the Washington impasse.

If Congress brings the country to the brink of default, Sinai said, US credibility will be on the line. For now he’s telling clients, “Keep your powder dry ‘till the dust clears,’ ’’ Sinai said. “Don’t take chances when all this nuttiness is going on.’’

Beth Healy can be reached at Beth.Healy@globe.com.
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