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Potential Impact of Government “Shutdown” on the Stock Market?

Potential Impact of Government “Shutdown” on the Stock Market?

September 29, 2023

Potential Impact of Government “Shutdown” on the Stock Market?


Before I answer the question, allow me to clarify the government is not “shutting down.”  This is a media / political phrase that in my opinion is not telling the full story.  What may happen if Congress doesn’t pass some funding bills, is that there may be a lack of appropriation (available cash) to pay some bills.


Social Security, Medicare and military spending will continue.  Your Social Security check will still come on time and members of the military will get paid.  As a side note, members of Congress will also continue to be paid.  However, some essential workers like TSA agents at airports, air traffic controllers, and fire fighters in National Forests will be required to work but won’t get paid until their programs are funded.  So, while the airports are open and working, national parks and campgrounds may be closed.  Let’s call it a “brownout” not a “blackout” …power is not totally off, just scaled back and perhaps dysfunctional.


If you care, the only way that Congress is not paid during a “shut down” is if Congress changes the law to eliminate their own paychecks or at least defer their paychecks until the funding laws are passed.  Will that ever happen? I think not.

                                                                            

Back to the question regarding the stock market.  There have been nine Federal government shutdowns since 1981.  The events in 1984 and in 1986 each lasted about four hours.  Three shutdowns lasted from one to five days, one was sixteen days long in 2013; 21 days in ’85-’86; and 35 days in 2018 – ’19.


The effect of the “shut-down” on the stock market has been minimal in the past.  The S&P 500 in October 1985 went from 581 before the shutdown to 687 a month after the shutdown.  In July 2013, the S&P 500 went from 1,615 before to 1,848 a few months after.  The last shutdown in 2018 saw the S&P 500 go from 2,579 before to 2,744 less than a month later. 


https://finance.yahoo.com/quote/%5EGSPC/history?period1=1535760000&period2=1559347200&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true


A protracted shutdown can affect the economy.  JP Morgan Chase estimates that GDP growth will be reduced by 0.1 percentage point for each week of the government shutdown.


https://www.forbes.com/sites/bill_stone/2023/09/24/the-economic-and-market-impacts-of-a-government-shutdown/?sh=5c2db9a95b7a


The stock market is choppy now.  2022 was not a good year through September, then a great last quarter of 2022.  2023 was great through August, but September has not been great. 


Unemployment was 3.8% in August 2023 as reported by Bureau of Labor Statistics.  Inflation was 3.6% in August 2023 up slightly from to 3% in June.  The Fed will probably keep interest rates high well into 2024 to continue to pressure inflation downward in the attempt to keep it from rebounding.  The consumer is still spending money.  It appears the fears of recession are abating.  Oil prices are high and gas prices are crazy high.  From my desk, there is more to be optimistic about than negative.


https://tradingeconomics.com/united-states/inflation-cpi#:~:text=US%20Inflation%20Rate%20Lower%20than,from%20its%20peak%20of%209.1%25.


In closing, the S&P 500 closed today, September 26, 2023 at 4,273.  Please note the levels mentioned a few paragraphs earlier….581 in 1985; 1,615 in 2018; and 2,579 in 2018.  And today it was at 4,273.  Events (government shutdowns, covid, recessions, etc.) can feel like the end of the world because they are happening right now, but when we step back and look at the events through time the impact may no longer seem as major. 


The key to successful investing is not “timing the market” but “time in the market.”


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