Budget battles have Congress up all night. Photo by Mark Wilson/Getty Images.
Gridlock! Filibuster! Economic doom! Or so say some headlines, with Congress seemingly deadlocked over the budget and a potential government shutdown looming. But shutdowns aren’t inherently bearish—or, given their relatively short duration and the magnitude of services impacted, a big economic negative. Politicking might roil sentiment in the near term, but whether Congress compromises at the 11th hour or after the deadline, the bull market should continue.
The impasse is nothing new. Congress hasn’t passed a budget since 2009—instead they’ve passed continuing resolutions to fund the government. The current one expires September 30, and lawmakers say renewal should be a formality. But the House and Senate have locked horns over whether the resolution should defund the Affordable Care Act. Right now, following the Senate’s 100-0 vote to move forward on a bill to fund the government (and the ACA), it will soon be the House’s move. If both houses don’t pass the bill by October 1, it’s shutdown time.
Which sounds scary! But really isn’t—it impacts relatively few services Americans use day-to-day. “Essential” federal workers (e.g., uniformed military personnel and air traffic controllers) keep working—they just receive IOUs until the new bill passes. Mandatory payments like Social Security still go out. Only “non-essential” operations pause, with staff furloughed. That will cause some inconveniences, like delays for new Social Security cards or passports. And folks planning to visit National Parks or the Smithsonian will have to make other arrangements. But inconvenience and economic impact are two separate issues, and the latter is typically minimal. As is the broader market impact—most publicly traded firms’ revenues don’t depend on Yellowstone and Yosemite getting maximum visits. Yes, some businesses—hotels and restaurants, particularly—will feel a squeeze if a shutdown forces tourists to cancel, but scaled to the entire US economy, the losses aren’t huge. Similarly, while a shutdown would pinch furloughed and IOUed workers, the impact on total national income—and by extension consumer spending—should be marginal.
Hence why shutdowns typically have minimal market impact. We’ve seen 17 shutdowns since 1976, many of them lasting fewer than 10 days. The two most recent—November 14 – 19, 1995 and December 16, 1995 – January 6, 1996—occurred smack in the middle of a 10-year bull market. The one prior, October 5 – October 9, 1990, ended two days before the 1990s bull began. Six occurred during the 1980s bull. Only one—the two-day closure from November 20 – 23, 1981—happened during a bear. That’s not to say shutdowns are bullish! Just that so many more variables impact stocks—especially if you think globally.
But, some say, it’s different this time! It’s not just a budget battle—it’s a debt ceiling battle—a potential shutdown and default in one! Which seems a touch overstated—this timing quirk doesn’t change anything. Call us cynical, but we have pretty strong faith Congress would find a way to stonewall over the debt ceiling whether or not it loomed 16 days after a budget deadline. Just as we’re confident lawmakers would tussle over the budget without the debt limit approaching. This is just what politicians do. They haggle, stall, hold 21-hour symbolic filibusters (including, impressively, readings of Green Eggs and Ham—for the kids at home), concede a bit, stall some more, claim they’ve abandoned all hope, and then, usually at (or after) the last possible minute, they compromise, leaving everyone wondering what the fuss was.
Still, it’s possible October 17 comes and Congress has neither a spending bill nor a new debt limit in the books. But this—despite what many say—doesn’t mean we default. It just means the Treasury prioritizes some payments—namely, interest payments—over others, doing what it can with cash on hand each day. This is NOT “simply default by another name.” Default only refers to missing debt payments. The risk of that happening is next to zero. Were it otherwise, US Treasury yields likely wouldn’t be falling.
Markets are smart and forward-looking—they know Congress will get past this. The exact timing doesn’t much matter. To investors, it might feel like timing matters, which is why we could see some sentiment-driven volatility if the deadlock persists. But over time, as fundamentals win out, the bull should march on.