Congress Stuck in Stalemate

Impact on U.S. Federal Funding. 

Congress remained deadlocked over an agreement to fund the U.S. federal government for the coming fiscal year, which began on October 1. Historically, there’s no definitive correlation between government shutdowns and market returns, suggesting that investors should focus on their long-term plans rather than succumbing to the surrounding noise.

Dissecting the Debt Ceiling Debate

It’s crucial to differentiate between the ongoing negotiations to keep the government fully functional and the earlier debate on whether to raise the debt ceiling. The latter posed a significant risk of a potential U.S. default if lawmakers didn’t raise the ceiling. A default is when the U.S. Treasury lacks sufficient resources to meet the government’s obligations, which could severely impact U.S. creditworthiness and send shockwaves through the global financial system.

Deconstructing Government Shutdowns

A government shutdown occurs when non-essential federal services are suspended due to the lack of approval for a new law to fund discretionary spending programs before the fiscal year deadline. If a new funding bill isn’t agreed upon, Congress may pass a “continuing resolution” to extend previous funding levels and keep the government fully operational.

Understanding the Impact of Government Shutdowns

During past government shutdowns, nonessential activities in various departments—like national parks and museums—have ceased. However, critical functions such as Social Security benefits, air traffic control, and the Postal Service generally remain unaffected. Each agency provides clear guidelines on the scope of its activities during a shutdown. Shutdowns do not impact state and local government functions independent of federal funding.

The Market Impact: A History of Mixed Results

While shutdowns can trigger market volatility, there’s no consistent correlation between shutdowns and market returns. Markets often react to the uncertainty in Washington, but historically, equities have ended up in positive territory more than half the time during shutdowns.

Standard & Poor's 500 Index price return during U.S. government shutdown

Economic Ramifications of Prolonged Shutdowns

The economic implications of a shutdown largely depend on its duration. The Congressional Budget Office (CBO) estimated that the most protracted recorded shutdown in 2018-2019 slightly impacted real GDP in the fourth quarter of 2018 and the first quarter of 2019. The shutdown mainly dampened economic activity due to the loss of furloughed federal workers’ contribution to GDP, delayed federal spending on goods and services, and reduced aggregate demand.

Staying Focused on Long-Term Results

A government shutdown is only one of many factors influencing markets. Given the numerous variables at play, predicting the effects is impossible. Despite political divisions making the threat of government shutdowns more prevalent, it’s paramount for investors to remain disciplined, diversified, and patient.

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