Though it's been obscured in market-related news coverage of
Syria and the FOMC over the last few weeks, the political
brinksmanship over the US federal budget and the debt ceiling is
yet again mounting.
Deadlines (specifically, October 1) are approaching fast, and
though the US House of Representatives is prepared to pass a CR
(continuing resolution) to provide stopgap funding for the federal
government through December 15, 2013 that the Senate and President
Obama can work with (albeit
with significant amendments
), the possibility of a government shutdown is real -- and sounds
So how much punishment can we expect equity and bond markets to
sustain if the US government goes over the edge?
The only plausible baseline is to look at the
government shutdown: eighteen years ago during the standoff between
Clinton and a similarly "recalcitrant" House of Representatives led
by Speaker Newt Gingrich.
(INDEXSP:.INX) reaction speaks for itself:
S&P 500 - Monthly: Government Shutdown and
Click to enlarge
Even intramonth volatility November 1995-January 1996 was minimal.
Talk about shrugging off a "crisis."
In contrast, and in more recent memory is the debt ceiling showdown
of summer 2011. One can argue over whether the proximate cause of
the August-October 2011 correction was the near-government shutdown
and (further-) diminished fiscal policy credibility enjoyed by
Congresss, or in response to the first-ever sovereign downgrade of
the US by Standard & Poor's. The correction was brief, severe
(just shy of a legitimate bear market), and quickly pushed down
into the past by a relentlessly advancing market.
How about bonds? Do they tell a different story?
US 30-Year Treasury Bond Futures (ZB) - Monthly: Government
Shutdown and Near-Government Shutdown
Click to enlarge
The 30-year ramped into the climax of the Clinton-Gingrich
standoff, and did not begin to sell off until
the federal government reopened for business in January 1996.
Once again, 2011′s near government shutdown played out with marked
difference. Here, though US sovereign debt (that is, Treasuries)
, the 30-year staged a dramatic advance in a truly ironic bid for
safety and a testament to the sanctity of US government debt and
the US dollar's reserve currency status if ever there's been one.
Every moment in the market is unique, and today is certainty filled
with anxieties all its own. But if history is any guide -
fortunately, we're painfully under-served with examples of US
federal government shutdowns - however pitched the political
theater becomes, equity markets may just take a shutdown in stride
(another sovereign downgrade is another matter). Bonds did suffer a
rockier road over the six months following the 1995-1996 shutdown,
though it's worth mentioning they advanced
the shutdown but bottomed and swiftly pivoted higher beginning in
the fall of 1996.
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