How I learned to stop worrying and love the government shutdown
A "government shutdown."
It certainly sounds like a foreboding event in a modern developed nation, much less the largest economy on the planet. Surely such an event would be extremely rare?
Looking back at the historical record, that's not actually the case.
Since the current congressional budgeting process was enacted in 1976, there have been eighteen separate government shutdowns (or "spending gaps" as they're called on Capitol Hill). The first six of these actually didn't impact government functioning in any way, but since 1980 all shutdowns have mandated at least a partial shutdown of government agencies.
It's worth noting that not all such shutdowns have been a result of politically contentious debate over which programs to fund; in fact, one shutdown in 1982 took place because congressional leaders were too busy partying at a barbeque and forgot to pass a funding bill on time.
Nowadays though, every issue is hyper-partisan, and the current debate over children's health insurance and immigration is clearly more contentious than a fundraising dinner. As of writing, the U.S. House of Representatives has passed a one-month temporary spending measure to kick the proverbial can down the road, but the bill's prospects in the Senate are looking increasingly bleak. If no agreement is reached by the end of the day, certain government services will shut down at midnight.
So what does this mean for markets?
Based on the continuing uptrend in the stock market, investors are relatively unperturbed. Even the U.S. dollar has stabilized above the key 90.00 level this week, despite increasingly dire headlines out of Washington. While we always prefer to take a "glass half full" outlook, it's worth exploring what could happen to stocks and the dollar if the government is indeed forced to shut down tonight.
For inspiration, we're looking to the most recent spending gap, in October 2013 (before that, the most recent government shutdown took place in 1995). Back in 2013, Republicans refused to vote for a bill that increased discretionary spending and demanded a one-year delay on rolling out the Affordable Care Act. That shutdown lasted 17 days and involved 850,000 federal workers (40% of the total federal workforce) getting furloughed, only ending when House Speaker John Boehner backed down. The 17-day shutdown was the second-longest since 1980 (behind 1995-1996), providing an example of a bad (we hesitate to say "worst) case scenario.
As they are now, U.S. stocks were in a prolonged uptrend heading into the shutdown. As the prospects of a timely agreement faded, the S&P 500 sold off in the week prior to the shutdown. The selling carried over into the first week of the shutdown as traders braced themselves for a prolonged stalemate, but once an agreement appeared likely, the stock market rallied back strongly, actually finishing the shutdown period higher than where it started.