Government shutdown lowdown

E*TRADE Securities2

01/26/18

It was a slightly different case of the Mondays for the US government this week. Lawmakers were unable to reach a funding agreement before a midnight deadline last Friday, January 19, causing certain segments of the government to shut down.

But after negotiating over the weekend, on Monday Congress came to terms on a stop-gap bill. The deal guarantees funding through February 8, buying Congress yet more time to resolve the spending and immigration disputes that led to the shutdown.  

As for the market, we recap its ho-hum reaction below and discuss how investors may want to view events like these. After all, the clock’s still ticking on lawmakers (and with Groundhog Day right around the corner).

Government shutdown takeaways

By definition

A government shutdown can occur when lawmakers fail to reach an agreement on a new federal budget for the upcoming fiscal year. What are considered essential government services, such as national security, disaster assistance, and borrowing and taxation, are largely unaffected.  

However, a number of nonessential government operations cease. And thousands of government personnel may be furloughed until an agreement is reached.

Note that a shutdown is different than a failure to expand the debt ceiling (which is required every so often for the US Treasury to borrow money for purposes of financing government spending). And they are not uncommon. There now have been 19 since 1976, or roughly one every two years. Typically they are short in duration, with the average shutdown lasting about a week.1  

Stocks shrugged it off

The S&P 500® closed at an all-time high on Friday, January 19 before the midnight deadline. It notched another record on Monday, January 22 as lawmakers put the finishing touches on an agreement. Investors seemed more preoccupied with company fundamentals amid roughly 80 earnings reports this week. For the year, the S&P is up more than 6.2%.2

If history is a guide, most observers view short-term shutdowns as non-events for the equity markets. The S&P actually increased during the last three government shutdowns—it rose 3% in October 2013, 0.1% in December 1995, and 1.3% in November 1995.3 The average return across all 18 shutdowns is slightly negative, however.

Bonds too

US Treasuries have softened in 2018. This is likely related more to prospects for higher growth and inflation, than fears about the government’s ability to operate, or its safe haven status, either of which could drive Treasury buyers away.

Ratings agency Fitch confirmed that the shutdown would have no direct effect on the government’s AAA/Stable rating. Of more concern for Fitch would be whether a shutdown, or the political brinksmanship around it, affected the federal debt limit.3

If you're an investor

“The possibility of a shutdown was well-telegraphed, and equity markets didn’t skip a beat,” according to Mike Loewengart, Vice President of Investment Strategy at E*TRADE Financial. “Amid optimism about the stock market, tight labor conditions, and what could be the best three quarters of economic growth in more than a decade, this was a blip for investors.”

But Loewengart also notes that any event like a government shutdown, or even the threat of one, adds uncertainty to the market. Lawmakers know that too, and a weakening equity market, for example, could be a catalyst that causes lawmakers to find a comprehensive resolution. They also know that a shutdown could affect their prospects in the next election.

The deal reached Monday kicks the proverbial can down the road, meaning additional political machinations are likely. However, the political news of the day should not inform long-term investment decisions. Instead, we encourage investors to rely on a financial plan defined by a diversified investment portfolio built to meet their long-term investment goals.

 

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1. Vlastelica, Ryan. “This is what happens in the stock market when the government shuts down,” MarketWatch, 22 Jan. 2018. https://www.marketwatch.com/story/heres-how-the-stock-market-has-handled-past-government-shutdowns-2018-01-16

2. According to Bloomberg as of Jan. 25, 2018. https://www.bloomberg.com/quote/SPX:IND

3. “U.S. shutdown seen as threat to economy, not rating: Moody’s,” Reuters, 22 Jan. 2018. https://www.reuters.com/article/us-usa-shutdown-moody-s/u-s-shutdown-seen-a-threat-to-economy-not-rating-moodys-idUSKBN1FB1UF