A Week Without Washington Wouldn’t Wreck Stocks

On the prospects for averting a government shutdown December 8, President Donald Trump last week tweeted, “I don’t see a deal!” Although this may sound ominous, going without government for a while isn’t inherently bad for the economy or stocks.

Stocks faced government shutdown prospects in April and September. Both times Congress agreed on (bipartisan!) short-term funding fixes—aka continuing resolutions—and markets moved on. September’s three-month can kick also included a temporary lift of the Treasury’s borrowing limit, so debt-ceiling drama also features this time around. House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer were scheduled to talk with Trump last week, but after Trump’s aforementioned tweet, they declined to meet.^[i] Now, with beltway theatrics seemingly worked out of everyone’s system, they’ve decided to discuss matters Thursday. Can they hammer out a deal? What should investors expect? The Congressional choose-your-own adventure has a few options—kicking the can again (as short as a two-week stopgap),^[ii] actually passing a budget^[iii] or shutting down the government.^[iv]

In the event of a shutdown, essential personnel report for duty. Unless you’re visiting a National Park, you probably wouldn’t notice. Active-duty military would still report, although their paychecks may be delayed. Patients would still receive treatments at the National Institutes of Health, but no new clinical trials would begin. Animals at the National Zoo would still be fed, but the park—and all Smithsonian museums—would close. NASA’s Mission Control in Houston would stay open, keeping the space station aloft, and you’d still get the weather from the National Weather Service. Federal air-traffic controllers would remain on the job, as would airport screeners. The State Department would continue processing visas and passport applications, since they’re paid for by fees,^[v] and embassies and consulates would remain open for American citizens. The Postal Service, which has separate funding, would run as usual.

However, the US’s largest employer would still send a bunch of folks home—including workers at our favorite government statistical agencies. Annoying for us because official economic data go offline, but Congress usually inserts back pay for furloughed workers in the shutdown-ending agreement. While some 800,000 federal employees likely furloughed sounds like a lot, federal government accounts for only 6.5% of economic activity; the rest comes from the private sector (83.1%) and state and local government (10.4%).^[vi]

Shutdowns are historically short-lived and none have caused a bear market or recession. Whether the shutdown is short (a day) or long (21 days in 1996), stocks usually rise in the months after. Returns during shutdowns are often positive, too. In 2013, stocks rose 2.4% during the 16 days government closed, 4.5% during the first month after it ended, 7.4% during the first three post-shutdown months and 8.2% in the six months afterward.^[vii] In the 18 times government has shut since 1976, there was only one case where stocks were in the red a year after the shutdown ended—following 1976’s 10-day closure. This was a correction, not a bear market, and it didn’t begin with the shutdown.^[viii]

Now people argue shutdown threats cause uncertainty, but that isn’t how markets work. Markets saw this coming as soon as Congress struck that continuing resolution and debt limit suspension deal in September. The shutdown possibility isn’t surprising. Stocks have assessed all scenarios and likely outcomes and, whaddayaknow, they went up. If anything, getting a shutdown would end any lingering will they/won’t they uncertainty. Shutdown or agreement, at least investors know the outcome and can get on with life. Nor is it especially meaningful that we could get a shutdown when one party controls both houses of Congress and the White House. This is trivia, not a fundamental difference that could make market reactions much worse this time. It is also an example of the intraparty gridlock we have highlighted since Trump’s victory. This is a feature—not a bug!—of current politics since it prevents radical legislation from torpedoing stocks.

Markets understand that whether US government workers report for duty or not has little to no relevance for corporate profits globally. Trust their assessment over media hype.