Getting Ready for a Shutdown Showdown

Editors’ note: MarketMinder is politically agnostic, favoring no party nor any politician. Our commentary serves only to evaluate political developments’ potential economic and market impact, if any.

When one door closes on Congressional grandstanding like late-May’s debt-ceiling resolution did, new ones often open. No sooner did the Biden administration and GOP agree to lift the borrowing limit than threats of a fall government shutdown arose. As usual, pundits are speculating about the potential economic and market impact of shuttered services and furloughed public sector workers, and some deem it a headwind. While it won’t shock us if mounting shutdown chatter briefly dings sentiment, history shows shutdowns don’t have a lasting or material effect on stocks.

A couple weeks after the government struck the debt-ceiling deal—and less noticed in its wake—the Republican-controlled House Appropriations Committee adopted by party-line vote a $1.47 trillion discretionary spending measure for fiscal year 2024, which begins October 1. The problem: This is about -$120 billion below the $1.59 trillion President Joe Biden and Republican House Speaker Kevin McCarthy negotiated in their debt-ceiling compromise. The disagreement sets up yet another Congressional showdown this fall as it reconvenes on September 5—and races to pass 12 appropriations bills before the fiscal year ends. At stake: A government shutdown if the House and Senate can’t agree on spending.

So what happens if the looming showdown results in a shutdown? The government would maintain “essential” services—employing around three quarters of the federal workforce—but those deemed “non-essential” would face furlough. So for example, national parks and research facilities would close to the public, but animals at the National Zoo would still be fed and the National Institutes of Health would still conduct cancer treatments. Furloughed workers normally don’t get paid, but Congress typically restores back pay whenever it ends the shutdown. Federal economic statistics—like widely followed monthly employment and quarterly GDP reports—would also be delayed.

Furloughs aren’t fun—and data interruptions are inconvenient for us—but past shutdowns’ impact on stocks and the economy have been negligible. As Exhibit 1 shows, there have been 21 government shutdowns since 1976. Stocks may wobble a bit in the lead up to and during them. But when appropriation lapses, stocks have almost always risen in the months after—however short or long it is. Though they fell in the lead up, the last and longest—2018 – 2019’s 34-day ordeal—saw stocks rally the most during the shutdown, rising nicely thereafter. And the shutdown was hardly the only thing going on at the time. That isn’t an aberration—stocks rose during shutdowns more than half the time and climbed immediately after shutdowns in the vast majority of cases. No shutdown has ever been a bear market’s proximate cause.

Exhibit 1: Government Shutdowns Don’t Derail Stocks

Source: FactSet, as of 9/23/2021. S&P 500 price returns, 9/30/1975 – 1/25/2020.

The same goes for shutdowns’ economic impact—none have caused recession. The last overlap was 1990’s recession, which started in July, before October’s shutdown. Rather than cap them, most shutdowns have occurred during economic expansions. Which makes sense. The few weeks, if that, of the economic sliver they disrupt is tiny and barely noticeable against GDP’s far bigger and broader private-sector backdrop.

We don’t know how this episode will resolve. Uncertainty could flare, and an actual shutdown could knock sentiment initially. But stocks usually move on quickly, always looking 3 to 30 months forward on how political and economic developments are likely to affect earnings relative to current expectations. Shutdowns are at most a speedbump in this regard.