Managing Risks and Uncertainty Around the Government Shutdown, Stock Prices, and Market Bubbles
"Risk" and "uncertainty" are similar concepts. But your financial plan has to be prepared to cope with both.
I think that mix is what’s making some folks a little uneasy right now. In addition to the typical risks that all investors accept, we're also dealing with uncertainty around the government shutdown and what the effects on the economy will be until our leaders get back to the negotiating table.
And, despite strong market returns this year, some observers are uncertain about the outsized impact that big tech companies might be having on portfolios.
On today's show, we try to clear away some of the fog around the shutdown and the latest market data so that folks can start clarifying their plans for 2026.
1. "Will the government shutdown reduce the overall inflation rate?"
Probably not.
A government shutdown temporarily turns off "discretionary" spending, which is the spending that Congress approves every year for things like operating the national parks and transportation. The shutdown might slow down some businesses that rely on government contracts. But discretionary spending doesn't really contribute to inflation. And, when the government shutdown ends – which it eventually will – that pause in spending will end too. So, ultimately, the shutdown will probably have a net-neutral effect on inflation.
Speaking of the shutdown, a quick reminder that Medicare and Social Security fall under "mandatory" government spending. Seniors shouldn't experience any interruptions to their benefits.
2. "Are stocks overpriced right now? And are only a few stocks currently driving high market returns?"
For the most part, stock prices are a function of corporate earnings. So, when we talk about a stock being "overpriced" – or "underpriced" – what we're really asking is if a stock is fairly valued relative to the earnings of a company or a group of companies in broader market indices.
And, when folks ask about high valuations, often what they're really worried about is a bubble about to burst. The “bubble” that you might be hearing about on cable news and social media is in technology. In part, that's because the stock prices for huge companies like Apple, Amazon, and NVIDIA have a large impact on market indices.
However, the economy is bigger and more complex than any one basket of companies, or any one number. As I write this, the Dow Jones Industrial Average is up almost 5,000 for the year. But smaller companies are also up, as are indices that measure companies headquartered outside of the U.S.
Ultimately, a stock is worth what an investor is willing to pay for it. And people are willing to pay more for stocks right now because they believe alternatives, like CDs and government bonds, aren't as attractive. And, compared to years past, investors also have a lot more data and analysis at their fingertips, especially if they’re working with a professional advisor. If that data continues to inspire confidence in the future of the markets, then valuations will continue to climb as well.
For more on valuations and the markets, check out Matt Wilson’s latest Market Update Webinar.
3. "I keep hearing that 'the bubble' will burst soon. Should I move some of my money out of stocks? What is Keen Wealth's strategy for taking advantage of volatility in the markets?"
Many folks who are worried about a bubble are comparing today's market to the dotcom frenzy in 2000. But the "Magnificent 7" large-cap companies (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla) are trading at a price-to-earnings ratio that's less than half of how comparable companies were valued in 2000. Today's tech giants are also earning much more money and have more diversified income streams in areas like consumer electronics.
Of course, that doesn't mean their stocks will keep going up forever! And there isn't a bell that rings when stocks reach highs or lows. Learning how to weather the ups and downs of investing and make adjustments when necessary is a more reliable path to building wealth than trying to jump in and out of the markets based on today's prices.
For example, in 1996, as many observers worried that stocks were overvalued, Federal Chairman Alan Greenspan cautioned investors against "irrational exuberance." Some folks took that as a sign to sell. But the market continued to climb for another four years!
The Dow Jones was around 6,400 when Greenspan issued his warning in 1996. Today, even after the dotcom bubble, 9/11, the Great Recession, and COVID, it's approaching 48,000. Imagine being in your 30s or 40s thirty years ago, panicking that the markets were overvalued, and missing out on decades of growth.
So, what's Keen Wealth's strategy to cope with market volatility?
Plan ahead.
When you're working with my team and following a personalized, comprehensive financial plan, you can gain the confidence to avoid the kinds of knee-jerk reactions that can permanently damage your long-term prospects.
And when you do need to make an adjustment to deal with life’s uncertainties, you’ll have professional guidance and resources to help you stay on track towards your financial goals.
If you have more questions about the shutdown, the markets, or your retirement plan, let’s schedule a year-end review meeting to discuss.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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