Stock markets have historically brushed off government shutdowns, but the particularly keen parliamentary dispute over the latest funding bill could test its track record. On Friday, the US Senate continued to provide short-term funding to the federal government, voted to block proposals from both Republicans and Democrats. This will not lead to a clear path to avoid closure when the meeting ends on or after September 30th. In fact, Raymond James has found stocks rising due to the previous five government shutdowns, with the S&P 500, MIDCAP 400 and Small Cap 600 both increasing by about 3% over these periods. “In most funding gaps suggest that there is little evidence that the funding gap is a reasonable risk to equity performance, the overall index performance of stocks was positive (at least historically!)” Raymond James said that energy and real estate stocks tended to be top performers in these episodes, as technology and utilities are traditionally the weakest sectors. Indeed, the average increase in these five previous shutdowns was heavily skewed between the second half of 2018 and early 2019, during which time the S&P 500 exceeded 10%. The government’s closure coincided with a tremendous pivot from the Federal Reserve, which subsequently strengthened its stocks. The current funding dispute raises more concerns in some quarters. Karthik Nagalingam, US credit strategist at Deutsche Bank Research, wrote last week that the current economic background to the closure was the weakest thing, dating back to 1990, with paralysed governments only putting more pressure on them. “Continuous government closures could further weaken consumer sentiment, curb growth slowing and affect the way rating agencies see our financial concerns going forward,” Nagaringham wrote. “Unlike President Trump’s first term, the economic background is much less likely to enter into this potential shutdown battle with the labour market, which has been weakened over the past six months at the fastest rate since 2007 outside the pandemic.” “A negative shock could therefore prove to be more harmful,” he wrote. The growing tension between the two parties also suggests significant uncertainty for the stock market as Democrats are unlikely to retreat from demands on health funding. Raymond James’ Mills said both parties could delve into their heels into their respective requests to avoid setting precedents for future battles. “The possibility of a shutdown is increasing given the general lack of compromise on the issue as both sides are entrenched,” writes Mills. “The result is an increase in market volatility, reflecting the increased risk of headlines as negotiations intensifies, but… our basic case is a short (continuous solution) following the massive battle in November.” “For now, the key area to look at is whether House Republicans can move the bill without the need for a democratic vote. This is a scenario that determines the ultimate path to resolution,” added Mills.
