The government shut down, again. Interestingly enough, this marks the 20th time a shutdown occurred since 1976. The last time this happened was in 2018, when a 34-day standoff in Washington led to partisan finger-pointing in the media and endless social media debates between everyday Americans, each convinced their view was the right one. And so, sure, we could volley what’s right or wrong here too, but Thanksgiving is right around the corner so let’s agree to save that debate for the dinner table like a true modern-day patriot. Here’s what you need to know when it comes to markets and the economy during this time:
General Operations
- Some government-employed Americans will be furloughed until the shutdown ends, usually with backpay upon their return to work, so long as the current administration doesn’t eliminate their positions. This is separate from active military who will continue to work without pay.
- National Parks will remain open, but with limited staff. So don’t expect to see Mr. Clean in the bathroom.
- The FAA will still be staffed for safe travel as their jobs are deemed “essential” for safety, although there have been an increasing number of employees voluntarily quitting.
- FAFSA applications are still open, and the Department of Education will continue to award loans and Grants.
- Benefit checks for Veteran Affairs and Social Security will continue to process and be uninterrupted. Seniors relying on Medicare can expect the insurer to continue operations as normal.
- Banks will remain open as they operate independently to government.
Markets
- Historically, markets have averaged a positive gain across the government shutdowns since 1976. This is largely in fact that markets are extremely efficient and price in the implications of the scenario.
- Although markets have faired well overall during these times, there could be some heightened volatility as news comes out of Washington. This could be a good opportunity for those making monthly contributions into their portfolios.
- Treasury bonds are generally unaffected but could see a slight drop in yield as more conservative investors seek a “safe-haven” asset.
What We’re Keeping An Eye On
- The reduced government services, declined household income, stunted spending, and delayed economic data all have the potential of negatively impacting US GDP. Brief shutdowns in the past have shown minimal impact on GDP, but intuitively the longer the shutdown, the worse the damage. Much like what we saw in 2018 when the loss in economic growth was in the billions.
- The Devaluation of the dollar. A shutdown can undermine investor confidence in the stability and reliability of the US government. This could lead to a shift out of US assets and into more stable assets, such as Gold. But even with Gold continuing to hit new record highs, the dollar hasn’t yet fallen to a level that overly concerns us.
- At the time of this writing, the CME FedWatch Tool is predicting a 92% probability that the Fed will cut rates again at the October meeting by 25bps. However given the shutdown, some of the pertinent data that the Fed uses to help make decisions is expected to be delayed. While we still do believe there will be an October rate cut, the absence of this data could leave policymakers in the dark for the foreseeable future.
- How the consumer sector is impacted. For many Americans who aren’t receiving a paycheck until this shutdown is over, disposable spending and eating out could be expected to slow. This piques our curiosity about what is going to happen to the popular lunch and dinner spots around government buildings, or the many proximate store fronts, as foot traffic wanes.
- Overall health of the market. Both the S&P500 and the Nasdaq just recently hit another all-time high, indicating that markets have shrugged off the shutdown for the time being. But even with these all-time highs, we’re still keeping watch of how different assets classes perform and how it could impact portfolios in both the short and long term.
There’s a lot to unpack here, but please don’t forget, you don’t have to navigate it alone. We’re happy to help if you have any questions, concerns, or worries about how this may impact you!
Important Disclosures
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