How Does a Government Shutdown Affect the Stock Market?Submitted by Bernhardt Wealth Management on December 19th, 2018
One of the reasons some analysts have given for the recent jitters in the stock market is the much-publicized threat of a government shutdown on Friday at midnight, as President Trump demands $5 billion to build a border wall and his Democratic opponents refuse to cooperate with the demand. A shutdown appeared even more likely after recent televised talks between Mr. Trump and Democratic legislative leaders in which neither side appeared willing to budge.
In the last couple of days, the president has appeared to back off his demand for border wall funding as a condition of passing a budget, so, though other points of disagreement remain, a government shutdown seems less likely. In fact, Congress can pass a continuing resolution, which the president would have to sign, to keep the government operating until sometime in February. But it is still worth asking the question: What does a government shutdown actually mean for the U.S. economy and the stock markets, in particular?
It might surprise some to know that government shutdowns are not all that uncommon. In the last 42 years, there have been 20 government shutdowns, including two in the first two months of 2018. How did the stock markets perform during the periods before, during, and after these events?
On average, the S&P 500 has fallen 0.06% during the first week of a government shutdown—virtually unchanged. For shutdowns lasting at least two weeks, the index averaged a drop of 0.13%. But it is interesting to note that during the one-week period, the market actually went lower only 47% of the time; the majority of the time, it rose.
What about the broader U.S. economy? To get a handle on this, we need to understand which sectors of the government are actually affected. First of all, some sectors, deemed crucial to the safety and security of the nation, are not affected at all. Active-duty military forces continue to receive their pay; Social Security, Medicare, and other entitlement programs continue to receive their funding. But for the programs that are affected, employees are either furloughed without pay or must work without receiving compensation until the government is fully funded again. The net effect of a full shutdown on U.S. gross domestic product (GDP) is a reduction estimated at 0.024%. In this case, however, because of partial continuing resolutions already in effect, only about a fourth of the government would be inoperable, so the reduction in GDP would be more like 0.008%. This nets out at around a half a percent per month in reduced GDP—and it is unlikely that the shutdown would continue that long.
The bottom line, it seems, is that while a government shutdown is certainly not a good thing for the stock market or the U.S. economy, it is probably a long way from a disastrous event. And it certainly should not influence an investor to abandon a disciplined, diversified, and well-allocated investment policy.
If you have questions regarding your portfolio and a government shutdown, we recommend that you talk to your financial advisor.