Markets & Economy

Early Saturday morning, after Senate lawmakers failed to pass a short-term funding bill, the U.S. federal government began a shutdown of all non-essential services in the first federal government shutdown since October 2013. To reopen the government, the Senate needs a 60 vote supermajority, meaning that Republicans and Democrats will need to work together. Broadly speaking, Democrats are demanding passage of the DREAM Act, while Republicans and President Trump are demanding funding for the border wall.

Social Security, Medicare, Medicaid, and government bond interest payments will continue to be made during the shutdown. Emergency personnel such as active duty military, law enforcement agents, federal hospital doctors and nurses, and air traffic controllers are also unaffected. On the other hand, non-essential federal workers including roughly half of the Department of Defense civilian workforce, the Park Services, and other non-national security Federal Agencies are closed. Notably, members of Congress are still paid.

This morning, U.S. stock markets are mixed as investors digest the news and resolution proves elusive. In today’s post, we briefly highlight our thoughts on how the shutdown may impact the economy and the financial markets.

Economic Implications

The disruption in non-essential services can affect the economy through several channels. According to a Congressional Research Service report on the 16-day 2013 shutdown, “federal worker furloughs over the course of the shutdown were equivalent to 6.6 million work days, peaking at 850,000 workers furloughed at the beginning of the shutdown.” Federal employees that are on unpaid furlough have less money to spend in the economy. The report highlights that a review of third-party economic estimates finds a GDP growth reduction of at least 0.1% for each week of the 2013 shutdown.

Additionally, there may be other economic implications such as government revenue declines due to both a reduction in the tax base and the shutdown of services. Any national park closures also have the potential to weigh on local economies that depend on tourism dollars linked to park visits. Further, to the extent that business, consumer, and investor confidence is eroded and uncertainty continues to rise, spending and investment plans may be negatively affected.

Market Implications

Financial markets have exhibited elevated levels of complacency in recent months, so rising political uncertainty may lead to a pickup in sentiment-driven market volatility. The level of volatility will likely be commensurate with the level of political dysfunction on display in Washington. During the 2013 shutdown, volatility rose by 55%, and it could be expected that something similar plays out should the current shutdown drag on.

Our indicators do not suggest that the economy is showing signs of overheating or that a recession and/or bear market is imminent. Nor do we expect any dramatic shifts to underlying economic trends. We would therefore view any short-term dislocations in the market as a buying opportunity. To the extent that equity prices pull back to more attractive levels, we would look to purchase strong companies with sound fundamentals that meet our investment strategies and pricing disciplines, and/or increase exposure to current portfolio holdings that are tracking their investment thesis according to our expectations.