How Would a Government Shutdown Impact the Stock Market?
Last night, House Speaker Kevin McCarthy sent Representatives home for the weekend. That’s right, even though the House has failed to pass a defense bill and is on the verge of shutting down the government because of their inability to pass a funding bill, they finished their week on Thursday. And then they wonder why they are less popular than toenail fungus and cockroaches.
There is, understandably, widespread frustration with the situation, especially among the Republicans who aren’t part of the holdout. The accepted line is that their party is being held hostage by a few extremists, but honestly, if the views of those extremists didn’t have support of a big section of the party’s base and the majority of party members in their own districts, they would have given up on this a long time ago. Instead, they live in a world where what they are doing is seen as heroic rather than foolhardy and shutting down the government would be considered a victory for them.
For everyone other than the extremists, though, it would be a disaster. It would do damage to the Republican Party as a whole, with Democrats saying that it proves their point. They maintain that the Trump era Republican Party is in the sway of forces that will risk national security and economic stability in pursuit of their extreme ideological goals and is thus, to all intents and purposes, incapable of governing. That may be an excuse for their own partisan behavior and the Democrats’ failure to come up with a solution here, but it is hard to argue against that when the U.S. military is being crippled and a shutdown is on the cards.
However, the potential damage to the Republican Party is not what we as investors should be worried about, whatever our politics and wherever the blame lays for this mess. Instead, investors should be concerned about the impact of all of this on the market, and for that to be significant, this time would have to be different from previous shutdowns and close calls of shutdowns. “Starving the beast” has been a Republican tactic for a long time now, and shutdowns have been threatened and have even happened as a result but, to this point, the damage has always been limited and markets have recovered quickly.
Typically, what has happened in the past is that shutdowns have been averted at the last minute. Some concessions are made, and a compromise is reached just before time runs out. The threat causes a selloff of sorts, but once a deal is done, all of the lost ground is regained. There is an argument, though, that this time is different. The Republican majority in the House is slim enough that a relatively small number of rebels can prevent the passage of a bill; assuming, of course, that Speaker McCarthy doesn’t enlist the help of Democrats. More than that, though, this particular group of rebels seems singularly unphased by the possibility of benefitting the enemies of America, or of crashing the global economic system.
If that is the case, then we need to look at a recent time when a shutdown actually occurred for clues as to what to expect this time around. The Tea Party Republicans who forced a sixteen day shutdown in 2013 may be less extreme than the rebels of today, but their rhetoric was equally aggressive and bombastic, and they did hold out past the date when funding ran out. The chart for the S&P 500 during that shutdown, though, is the main reason why investors should not be too worried this time around. The two candles marked by blue arrows on the chart below represent the two weeks during which the government was shut down. As you can see, while there was a drop (see the long “tail” on the bottom of the second candle), it didn’t last and it was followed by a strong rally.
I suppose you could say that another difference here is that the Fed has been raising rates and looks like continuing to do so, so the economic impact of a shutdown on an already weakened economy will be exaggerated. That could be true, but the above chart suggests that the impact of the shutdown in 2013 was zero, and even an exaggerated nothing is still nothing.
While there are reasons not to be massively bullish on stocks right now, both history and logic suggest that the inability or unwillingness of politicians to do their job is not one of them. As a result, any weakness we may see next week as the September 30 deadline approaches will be a buying opportunity, at least from a short-term trading perspective.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.