The White House told federal agencies to prepare for a shutdown beginning next week if Congress fails to come to an agreement over government funding. How did the stock market react? The
Dow Jones Industrial Average
finished the week with slight gains.
A cautious market isn’t out of the ordinary before a potential government shutdown. But those shutdowns also haven’t left much of a dent, either.
“It’s normal for the market to sort of take a breather and be a little bit nervous ahead of a shutdown,” said Charles Lemonides, chief investment officer of New York hedge fund firm ValueWorks.
Unless Congress passes a funding bill by Sept. 30, the federal government will face its first shutdown during the pandemic, and the fifth over the span of a decade.
House Democrats approved a bill Wednesday that would simultaneously fund the government until Dec. 3, and suspend the U.S. borrowing limit. Without raising the limit, the U.S. could default on its loans, warned Treasury Secretary Janet Yellen. The bill, however, is expected to be killed in the Senate, where it would need at least 10 Republicans to approve it.
Historically, government closures alone haven’t meaningfully impacted equity returns, wrote David Kostin, chief U.S. equity strategist for Goldman Sachs, in a note issued earlier this week.
In the 14 shutdowns since 1980, the S&P 500 posted a median return of -0.1% the day the budget was set to expire, 0.1% during the shutdown periods, and 0.3% on the day the shutdown was resolved, according to Kostin.
|Shutdown Start Date||President||Length in Days||Performance During Funding Gap||Day Funding Resumed||Performance One Week Later||One Month Later|
Data compiled by Dow Jones Market Data. Statistics only include funding gaps since 1976 and those lasting five days or longer.
Source: Congressional Research Service
A separate Dow Jones Market Data analysis found that during the last four government shutdowns that lasted more than five days, the S&P 500 made gains. In the most recent shutdown, which started Jan. 25, 2019, and lasted 35 days, the S&P 500 rose10%, according to the analysis.
The analysis also points toward markets making a quick recovery after a prolonged shutdown of five days or more. The S&P 500 was, on average, positive one month after a government closure.
While shutdowns don’t consistently impact markets, the underlying macroeconomic environment does, Kostin wrote. The economist has flagged the debate over the U.S. debt limit, and the Treasury’s ability to pay its bills, as an impending risk to the market.
Lemonides was more optimistic, saying he expects the market will rebound quickly after the debt ceiling showdown is resolved due to the influx of economic stimulus included in the bills Democrats are looking to pass.
“Once the shutdown is resolved, the bigger picture that was in place before and is in place afterwards becomes the driver,” Lemonides said.
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