Don’t bet the House (of Congress)
The U.S. government is on a path to shutdown at 12:01 a.m. ET on Sunday October 1st with no deal in sight. Let's explore what "shutdown" means and discuss how past occurrences have affected financial markets.
A government shutdown occurs when non-essential discretionary federal programs (think: federal agencies, offices, and many federal employees) close or become furloughed. It can happen when Congress fails to pass sufficient appropriation bills or continuing resolutions to fund federal government operations and agencies, or when the President refuses to sign such bills or resolutions into law.
Economic Impact:
A prolonged shutdown can have a negative short-term impact on the economy. It can slow economic growth, reduce consumer and business confidence, and lead to disruptions in various sectors. The Congressional Budget Office estimated that the most recent shutdown (December 2018 to January 2019) resulted in around $3 billion less economic activity (gross domestic product).
Duration of past shutdowns:
2019: 35 days
2018: just several hours
2018: 3 days
2013: 17 days
1996: 21 days
1995: 5 days
How could it affect financial markets?
Market Volatility:
Government shutdowns can lead to increased market volatility. Uncertainty about the duration of the shutdown and its broader economic implications can make investors nervous, leading to potentially larger fluctuations in stock prices. Note: Social Security and other mandatory government payments are still sent out in a shutdown.
Interest Rates:
If the shutdown raises concerns about the U.S. Government's ability to pay and service its debt, it could potentially lead to higher interest rates, which can impact bond prices and the broader financial market.
Post Shutdown and Recovery:
We looked at stock markets leading up to and after a government shutdown to get some historical perspective. While each shutdown had unique factors (i.e., interest rates, unemployment levels, and inflation metrics) we note some consistency. We find that stock market returns for the two months leading up to a shutdown were on average down –1.3%. In the two months after reopening, stock markets were up on average +2.5%. Statistically there’s not enough evidence to warrant making changes to a portfolio one way or another. Don’t bet the house (of Congress) on this one.
It's important to remember that while a government shutdown can introduce short-term volatility and uncertainty, investment decisions should be based on long-term goals and strategies. At Vector, we believe the best way to preserve purchasing power and grow wealth over the long term is to diversify across asset types and time periods, matching your investments to your financial life.
Check out past Market Perspectives focused on these related topics:
"Servicing the Debt"
Immediate debt ceiling concerns versus America's $31 trillion debt.
"An Interest in Debt"
We discuss the effects of interest rates on government debt.
V23272050