By Lauren Young
NEW YORK (Reuters) - Should I stay or should I go?
The looming U.S. government shutdown has plenty of investors asking if it's time to exit the stock market or stay put.
Stock prices have been under pressure in recent days in anticipation that the government may shut down on Tuesday if lawmakers are unable to agree on a spending bill.
With the S&P 500 less than 3 percent from its all-time high, some advisers said the threat of a shutdown is a chance to reap some gains in a market that could be ripe for a correction anyway.
Yet most financial advisers and institutional investors interviewed by Reuters on Monday are telling clients to hang tight - for now. Only a minority are putting clients on red alert and jumping into cash or other safe-haven assets.
For most folks who manage money, government shenanigans are becoming a regular part of the environment, after similar battles in 2011 and 2012.
"There may be some short-term market moves ... but markets are getting increasingly immune to nonsense out of Washington," said Eric Stein, co-director of the Global Income Group at Eaton Vance in Boston, who manages more than $17 billion, including Eaton Vance Global Macro Absolute Return fund and Eaton Vance Strategic Income fund.
A key argument for staying put: Previous shutdowns haven't had much of an impact on portfolios. Bank of America-Merrill Lynch examined 17 government shutdowns since 1976 (all but three of which took place before 1987 under Presidents Ford, Carter and Reagan). In the month prior to a government shutdown, the market gained 0.1 percent; it dipped 0.8 percent during a shutdown, and then bounced, gaining about 1.1 percent in the month following a shutdown.
BofA-Merrill strategists see any significant decline as a buying opportunity. But they said they view "the risk of a 10 percent correction brought about by political brinkmanship to be a low probability event."
Indeed, several money managers said they are buyers rather than sellers. "All short-term sell-offs related to the government have been buying opportunities in the past, and I view this as just another opportunity to buy at a discount from an all-time high," says Matthew D. McCall, president of Penn Financial Group in New York City.
McCall's shopping list includes European banks along with a few exchange-traded funds. On Monday, McCall bought ING Group for one client. "Valuation-wise, European banks are better than U.S. financials, and they are still trading at a discount because of the black cloud hanging over the continent," said McCall, who manages $150 million in client assets.
McCall is taking advantage of market weakness to buy into an exchange-traded fund he has been watching for months - the Guggenheim Timber ETF. "Timber and land stocks typically do well during inflationary times, which we feel are around the corner," he said.
Still, not everyone is as confident.
It's been more than 20 months since the stock market had a 10 percent decline - known to professional investors as a correction. That is why Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank, said he has been advising clients to use the shutdown as an opportunity to trim back on U.S. stocks that have performed well this year and move money into lagging areas such as U.S. government bonds and emerging market stocks.
"People are nervous without question," Davidson said. "There's a post-traumatic stress mindset that's ever-present with investors given what we've been through," he added in reference to raw memories of the financial crisis.
Mike Chadwick, who runs Chadwick Financial Advisors, in Farmington, Connecticut, is in the doomsday group. Chadwick pulled all of his clients' money out of bonds in June and then over the past few months, also bolted from equities.
"Clients are now about 90 percent in cash," said Chadwick, who oversees $150 million in client assets. "We've cashed out winnings, and now are waiting for good bargains."
Another bear is Jeff Seymour, a registered investment adviser at Triangle Wealth Management LLC in Cary, North Carolina. "I am poised for the second time this year to take the largest short position I've ever taken against the S&P 500," Seymour said in an email. "I own 0 percent long equities in client accounts."
On Monday, the markets were modestly lower, but big defense companies, including Raytheon and Lockheed Martin were underperforming, in what was seen as a knee-jerk response to the expectation for a shutdown.
However, Goldman Sachs strategists in a note said companies with more than 20 percent of their revenue from government contracts have not underperformed the broader market, a sign investors remain less concerned about a protracted shutdown.
"Implied volatility for these stocks is at its lowest level since the financial crisis and has dropped sharply since the start of the year," they said.
"The budget stuff has been around, especially in the last month," said Joel Tillinghast, manager of $42.2 billion Fidelity Low-Price Stock funds in an email.
With the Nasdaq Composite Index up 25 percent in 2013, Tillinghast's assessment is: "No worries."
One key reason for financial advisers - as well as big institutions - to keep money invested in the market: taxes. The outsized gains of the stock market in the past year mean that investors will be left with a big tax bill if they sell now, several advisers said.
"You have to be very selective when taking profits off the table, especially in this stock market," said Patrick R. McDowell, an investment manager at Arbor Wealth Management in Miramar Beach, Florida. It's easier to capture gains in retirement accounts where investments are tax-deferred - "even there prudence is paramount," McDowell said.
If an agreement is reached within a day or so, the impact on portfolios will be minimal, says Tracy Burke, an investment consultant at Conrad Siegel Investment Advisors in Harrisburg, Pennsylvania.
If the shutdown runs longer than a week, "it could potentially send the market into a tailspin and go into 'correction' territory," Burke says.
The bigger worry is whether the U.S. government will be able to borrow in the future, and whether this fight is merely a precursor to a battle over the debt ceiling. A fight over raising the U.S. borrowing limit in 2011 prompted a downgrade of the U.S. credit rating and a 19 percent fall in the S&P 500.
"I'm more concerned about the debt ceiling because there is so much dysfunction in both chambers of Congress," said Betsy Billard, a financial adviser at Ameriprise Financial Services with offices in New York and Los Angeles. She oversees $150 million in client assets.
(Additional reporting by David Randall, Ross Kerber and Beth Pinsker; Editing by David Gaffen, Martin Howell and Tim Dobbyn)