Notes From the Middle of a Government Shutdown
- 103025
- 2 minutes
So far (as of Thursday October 30th), this government shutdown is the second-longest in U.S. history. Equity markets have shown remarkable resilience despite Washington’s prolonged gridlock, maintaining momentum fueled by strong corporate earnings reports and anticipation of the Fed’s expected rate cuts. How does the government shutdown affect investors? Is the current bull run warranted, or are we headed straight for a market correction?
Typically, a government shutdown has little effect on overall market performance. The government has shut down 20 times in the last 50 years. On average, the S&P 500 has stayed relatively calm during a shutdown. That said, the average duration has been about 8 days, which this year’s shutdown has already surpassed.
Longer shutdowns threaten greater impact. At two weeks in, a U.S. Treasury official warned that the ongoing shutdown could cost the economy up to $15 billion a week in lost output. While endurable, that amount certainly isn’t negligible.
But it goes deeper than that. As mentioned, the Fed is expected to lower interest rates within the next month, mainly due to a softening jobs market. However, the Bureau of Labor Statistics (BLS) failed to publish its scheduled monthly jobs report earlier this month, a key data point for policymakers. The next report is currently scheduled for November 7th. Similarly, the Consumer Price Index (CPI) was delayed from October 15th and was rescheduled for the 24th. Until these and other government-supplied data become available, it will be virtually impossible for the Fed to move forward.
It’s not just the Fed that relies on these crucial data points to make decisions: investors, too, tend to look to these indicators to gauge the health of the economy and anticipate where we might be headed next. So, while the stock market has continued to ride the wave of AI optimism, if the shutdown continues and investors are made to navigate blindly for too much longer, we may see a pullback soon.
A prolonged government shutdown may affect international investors' appetite for U.S. investments. Between today’s weaker USD and yet another prolonged funding crisis, overseas investors may turn to what they perceive as more reliable investment options, such as gold or non-U.S. equities. “Every shutdown, however temporary, chips away at America’s credibility as the dependable steward of the global economy,” explains Nigel Green, founder and CEO of deVere Group. Considering, as well, the uptick in geopolitical risks in recent years, more potential for volatility may not seem especially attractive right now.
But it’s not all bad news. Bear in mind that these are all just possibilities, contingent on how things unfold in Washington. Even under the worst-case scenario, any resulting volatility is most likely to be relatively shallow and short-lived. A suitably diversified portfolio can be built to help protect against the sort of turbulence that may (or may not) be in store.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Beacon Advisory or Lincoln Investment. The material presented is provided for informational purposes only. When you link to any of these websites provided here, you are leaving this site. We make no representation as to the completeness or accuracy of information provided at these sites. Nor are we liable for any direct or indirect technical or system issues or consequences arising out of your access to or use of these third-party sites. When you access one of these sites, you assume total responsibility for your use of the sites you are visiting.
