Credit: Shutterstock photoThe pressure is on as President Trump and lawmakers from both parties have just a few more days to pass a spending bill. If the budget standoff is not resolved by the end of the week, the federal government will enter shutdown mode.
Of course, a government shutdown doesn't mean all federal government operations will cease. If we remember back to the most recent shutdown in 2013, it's only "non-essential" functions that will feel the effects.
This is bad news if you have a vacation planned that includes a stop at a national park, but if you're a non-essential government employee, you get a retroactively-paid vacation yourself. For workers in "critical services" like air traffic control, food inspection, and law enforcement, however, a shutdown brings no break.
The latest break in the budget negotiations came yesterday when President Trump took funding for his controversial border wall off the table, signaling that he was willing to wait on that measure if it meant avoiding a shutdown.
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And while that may make budget talks a bit easier, the partisan gridlock in Congress is likely to push a deal right up against-or past-this week's deadline. Shutdowns used to be considered a worse-case-scenario, but today's government seems to play by different rules.
For investors, this means that uncertainty is in the air, and we don't like that-ever.
But does the stock market ever actually react to government shutdowns? Let's take a look at the returns during the last few to see if there is any effect.
Market Reactions
To keep things simple here, we are only going to look at how the Dow Jones Industrial Average DIA performed over the course of the three most recent government shutdowns.
While today's partisan gridlock is relatively unprecedented, one can remember a similarly ineffective government during the mid-90s. In late 1995 and early 1996, Congress was having an equally tough time agreeing on a budget deal, and there were a pair of shutdowns as a result.
The first shutdown lasted just five days-from November 13, 1995 to November 1, 1995. On deadline day, the Dow Jones opened basically flat and continued to trade on a relative plateau throughout the day. Nevertheless, investors exhibited little hesitation during the shutdown, and on the day after a temporary bill was passed, the Dow Jones was nearly 2.5% higher than deadline day's closing point.
This temporary bill did not quash the disagreement between President Bill Clinton and Speaker of the House Newt Gingrich, and another shutdown occurred when a permanent deal was not met by December 15. This time, the federal government was shut down for 22 days.
This time, we saw the market pull back a bit, and the DJIA slipped almost 2% on the first trading day following the second shutdown. Nevertheless, the index was basically fully recovered once the shutdown ended three weeks later.
And this is not to say that there were no consequences from the 1995-96 shutdowns. In fact, a 2010 Congressional Research Service report found that the shutdowns impacted many corners of the economy. The report said that health services to veterans were curtailed, toxic waste clean-up was halted at 609 sites, the National Parks missed out on 7 million visitors, and $3.7 billion worth of federal contracts were adversely affected.
Not many members of Congress must have read that report, as the federal government found itself shutting down thanks to another budget disagreement in 2013. This shutdown lasted from September 30 to October 17 and included fights over funding for President Obama's polarizing Affordable Care Act.
After slipping about 0.8% on deadline day, the Dow Jones actually recovered a bit the next day, gaining just about 0.4%. There was certainly some volatility throughout the shutdown, but the DOW's lowest close was just 2.3% down from its closing point on deadline day-hardly a disastrous sell-off. The index was back over its deadline day levels immediately after a resolution was passed.
The Verdict
Political uncertainty can certainly cause share prices to move lower, and a government shutdown can have enough of economic effect for investors to logically worry about their portfolios. However, these short periods of uncertainty have clearly not resulted in massive sell-offs during the most recent shutdowns.
Sure, we should all keep an eye on Washington this week, but a shutdown-especially a short-lived shutdown-likely won't magically trigger a bear market.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
