Potential Government Shutdown: Going Back to 1960, What Does History Say?

Potential Government Shutdown: Going Back to 1960, What Does History Say?

September 29, 2023

Print/Read as PDF

My Take

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.

Debt Rating

  • 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. 




Get Ken's Weekly Market Commentary Delivered To Your Inbox!

Click Here to Subscribe´╗┐

-

-

-

Important Disclosures: 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. 

Investing involves risks including possible loss of principal.

The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

The Nasdaq-100 is a large-cap growth index. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.