As you’ve probably heard, the U.S. government is in the midst of its longest shutdown in history. And (the first question that might have come to mind) – what (if anything) does that mean for markets, and your investments, both now and later?
As context… A government shutdown in the U.S. occurs when Congress (the country’s parliament) doesn’t pass the bills necessary to continue funding federal government operations, or when the president does not sign off on the bills put forward by Congress.
That means that around 800,000 U.S. government employees have been put on unpaid leave.
Some government functions have been halted or scaled back. This includes maintaining national parks… inspecting the national food supply… and reviewing documentation so that companies can go public.
Contractors for the U.S. government aren’t being paid. And while some critical government functions are operating, workers also aren’t being paid.
Government shutdowns are nothing new.
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Since 1976, there have been 10 significant U.S. government shutdowns (excluding shutdowns of less than three days). (You can see them in the table below.) Before the current government shutdown, the longest one was in 1995-1996, for 21 days.
The current shutdown began on December 22, when Congress did not include the roughly US$5 billion funding for U.S. President Donald Trump’s planned border wall in next year’s budget.
Trump responded by refusing to sign off on the spending bill, and many government offices and programs have had to close their doors until they’re funded.
Do government shutdowns matter to markets? No… and, yes.
Market performance during shutdowns
As can be seen from the table below, during the 10 longest U.S. government shutdowns, global stock markets have both risen and fallen. There’s no real trend.
The current shutdown happened to coincide with one of the worst Decembers for markets in history – and a strong rebound. So during the government shutdown, the S&P 500 is up 9.3 percent. The MSCI World index is up 8.1 percent, and the MSCI Asia ex Japan index has risen 4.2 percent.
The second-biggest change in markets during a government shutdown happened in 1979, when the S&P 500 dropped 4.4 percent during a 12-day shutdown. The MSCI World index dropped 4 percent during the same time period.
The mixed performance of markets during government shutdowns makes sense. They’re usually short – so even during a normal (non-shutdown) 10- or 20-day period, markets wouldn’t move that much. And over a short time period, government has little effect on markets.
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After a shutdown
What happens in markets after a shutdown ends? In general, markets go up over the following three months and year.
As shown in the table below, the S&P 500 (with one exception), MSCI World and MSCI Asia ex Japan indexes have all seen positive returns in the year after a U.S. government shutdown. That’s not surprising – the overall trend of stock markets over the long term is up, after all. And as I mentioned, there’s no particular reason for a U.S. government shutdown to have much impact on stock markets over the next year.
Returns over the one month after a shutdown ends are more mixed. And in any given month, markets might be up or down – so it isn’t a surprise that’s what’s happened in the month after U.S. government shutdowns.
Is this time different?
One big reason that U.S. government shutdowns haven’t affected stock markets is that they’ve been short. This one, though, is the longest ever. And stock markets are up a lot – despite the shutdown.
But one of the most important by-products of the ongoing shutdown will be a slowdown in the U.S. economy. As the Financial Times reported on January 11…
“Jay Powell, the Federal Reserve chairman, warned that a prolonged shutdown could start taking a toll on the US economy. Mr Powell said that past government shutdowns had been fairly short-lived affairs that did not leave much of a mark on the economy. “A longer shutdown is something we haven’t had,” said Mr. Powell. “If we had an extended shutdown then I do think that would show up in the data pretty clearly.”
Worse, on Friday, a senior Federal Reserve official pointed to forecasts that quarterly GDP growth in the U.S. could be cut by 0.5-1.0 percent because of the shutdown. The U.S. White House forecasts that each week of the shutdown reduces economic output by 0.13 percent.
(However, it might be difficult to see the impact of the shutdown on the U.S. economy – because the people responsible for collecting that data aren’t working. Data on construction spending, wages, construction, manufacturers’ orders and other nuts and bolts aren’t being collected or analysed right now.)
Lower economic growth means companies might delay investment and hiring new employees. It also means that earnings might be hit. That is all bad for economic growth.
And that could have a much bigger effect on stock markets. So although U.S. government shutdowns haven’t had much impact on markets in the past, that might change if the current shutdown continues – and economic growth is hurt in the U.S. – and elsewhere.