The Effect Of The Government Shutdown On The Stock Market

erick4x4 for Getty images

erick4x4 for Getty images

For the third time this year, the U.S. government enacted a partial shutdown, which took effect December 22 as Congress could not agree on a funding deal to keep its doors open.

The main disagreement stems from whether the Trump administration would be granted the funds needed to fortify the U.S.-Mexico border. It was believed that the president and Congress had struck a deal to keep the government open for business until Feb. 8. But Congress pulled away from the agreement when the president insisted that the funding bill included provisions of $5 billion for the southern border wall between the U.S. and Mexico.

Owning a majority in the House, Congressional Democrats, essentially said “over our dead bodies.” The result was bloodshed on Wall Street. The Dow Jones Industrial Average closed 414 points lower (or 1.8%) on Friday, which amounted to a drop of 1,655 points, or 6.9% in just one week. This was the Dow’s deepest weekly decline in a decade. The panic extended to Christmas Eve Monday as the Dow plunged another 653 points, or 3%.

That was the Dow’s worst Christmas Eve performance in its 122-year history. Meanwhile, the S&P 500 index lost 2.7%. The tech-heavy Nasdaq Composite Index didn’t fare any better, losing 2.2%. Needless to say, investors who were waiting for a Santa Rally didn’t get it. The shutdown in particular has been brutal for stocks — as the broader market is now in steep correction territory, if not a bear territory.

It’s worth asking, aside from the increased volatility, what role will the shutdown play heading into 2019, assuming a resolution is not immediately reached? A government shutdown, as it sounds, is the closure of nonessential offices of the government. Because of lack of funding, federally-run operations will be forced to close and federal employees, unless considered ‘essential,’ won’t be allowed to work. And the government will operate using only cash reserves it has built up. But once that cash runs out, they too will also close.

As it stands, some 400,000 federal workers will be without pay until a resolution is reached. During the shutdown, while several government services will be closed, there are several that will remain open such as the IRS and the SEC. The latter regulatory service is important in that it allows the stock market to function. And that can be a good thing or a bad thing depending on one’s view of the shutdown and its impact on sentiment.

But it would seem there’s nothing to fear but fear itself — to steal a quote from President Franklin Roosevelt. According to an analysis from LPL Financial Research, the impact government shutdowns have had on the markets have amounted to a mere shoulder shrug. The research tracked 20 government shutdowns since 1976, including the most recent one occurring on January 2018 (the February shutdown did not interrupt government functions or services). The research determined that median performance of the S&P 500 has been 0%. During that span, stocks have risen half the time and declined half the time.

All told, on average the performance of the S&P 500 during the twenty previous shutdowns was a decline of 0.4%. This suggests that the stock market doesn't get too spooked by the event. The muted effect shows that investors care more about fundamental issues such as whether corporate earnings will rise or fall. While uncertainty remains the enemy of the market, we can be certain this shutdown will end. And its impact on the market or its long-term effect on the psyche of investors will likely be of no consequence.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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