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By Jeremy Glaser and Matthew Coffina, CFA | 09-30-2013 04:00 PM

Keep Focus on Long Run During Shutdown

A brief government shutdown won't have much of an impact on long term valuations and could create some buying opportunities, says Morningstar's Matt Coffina.

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. The government [has shut down], but what impact will this have on stock valuations. I'm here with Matt Coffina, editor of Morningstar StockInvestor, to take a closer look.

Matt, Thanks for joining me today.

Matthew Coffina: Thanks for having me, Jeremy.

Glaser: How worried should the average investor be about the impact of a shutdown on their portfolio in terms of fundamental valuations.

Coffina: I think the first thing to keep in mind is that a government shutdown is very unlikely to last really all that long. We've been on the verge of a government shutdown multiple times during the last several years, and always at the last minute, Congress has come through and found some kind of resolution.

Certainly, this time it seems to be different, where the two sides don't seem to be open to compromising at all. But I don't think it will take too many weeks of the government not functioning and political backlash for people to come back to the table.

That said, [now that the government has shut down] I think you have to keep in mind that our valuations are based on cash flows over the next several decades. While a government shutdown could weigh on economic growth in the near term, over the much longer run, it's probably going to be a rounding error when it comes to a discounted cash flow valuation.

Glaser: So [there are] no wholesale changes to fair value estimates?

Coffina: It's hard to see that happening. We do think the market is pretty fully valued or fairly valued already. I wouldn't say that there is a huge margin of safety in current stock prices. The market is trading pretty close to its all-time high, which is perhaps surprising that the market hasn't taken this more seriously.

The last time we saw this, the market sold off quite a bit when a shutdown seemed like it was going to happen, and then the market rallied right back when it didn't actually happen. So far, we haven't really seen that sell-off yet, and I think investors should be prepared for some elevated volatility in the near term here. But overall, I don't see any reason to go run out and panic and sell all of your common stocks. I'm certainly planning to stay the course with StockInvestor's portfolios.

Glaser: When looking across the various sectors, are there certain parts of the market that you think would be more affected by a shutdown than others?

Coffina: Probably not in the short run. If the federal government stops operating, it won't be good for the economy. Federal workers would be furloughed. It could hurt aggregate demand, which would be bad for the economy. Some sectors are obviously more exposed to government spending than others. The big one would be defense, but also health care to a lesser extent.

I think it's pretty unlikely that we're going to see serious cuts in Medicare or Medicaid spending or defense spending for that matter as a result of this. But those are the sectors that might be a little more exposed than others. But again, in the grand scheme of things, I think it's very unlikely that this budget impasse is really going to result in a material decrease in intrinsic value.

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