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In the present political climate, the government shutdown will be happening given the divisions that exist between factions in the House of Representatives, not to mention the divide between Senate Democrats and Republicans.
- It’s unlikely an agreement will be reached by the deadline at midnight, September 30. Even if it was, to put everything in place it couldn’t be finalized by October 1.
- As in past shutdowns, we do not expect the Washington drama to be a market-moving event. Going back to 1960, this is exactly what has happened in the stock market.
A Little History
- But markets are still nervous for valid reasons, most notably the potential of a Government Shutdown. So we looked at all government shutdowns under various political regimes since 1960 (N=20) to measure the market impact.
– Of the 20 government shutdowns since 1960
– The average shutdown lasted 9 days
– And markets on average were “flat”
– 1M post shutdowns, markets on average were actually higher by 1.2%
– The 1M median performance is even higher by 1.3%.
– So it turns out, shutdowns historically are less “market-altering” than most believe
– “This time,” still, it is possible markets are more “hyper-reactive” to a potential shutdown in October as sentiment is already weak.
Do Taxpayers Save Money Amid a Government Shutdown?
- Unfortunately, no. First, federal workers are guaranteed back pay. So even when government services are idle, workers continue to accrue their salary and compensation.
- More importantly, there is a sizable cost to the economy as some businesses often forego hiring and making investment decisions because those firms are unable to get federal permits or access to federal business loans.
What to Expect if There Is a Shutdown
- The Social Security Administration will continue to issue retirement and disability benefits, and payments would continue under the Medicare and Medicaid health programs. In addition, Military veterans' benefits would also continue to be paid.
- The 2 million U.S. military personnel would remain at their posts; however, roughly half of the Pentagon's 800,000 civilian employees would be furloughed.
- Essential workers such as border control, air traffic controllers, and TSA agents are still required to go to work and will receive back pay once funding is available.
- The Federal Emergency Management Agency (FEMA) would risk running out of funds for disaster relief and other recovery projects.
- The U.S. Postal Service (USPS) would be unaffected as it does not depend on Congress for funding.
- Moody’s Investor Services, the only major credit agency that has the U.S. at a top rating, stated that a U.S. government shutdown would reflect negatively on its credit rating. Moreover, it may underscore the weakness of U.S. institutional and governance strength relative to other top-rated sovereign governments.
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