The Week Ahead – Government Shutdown

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

At the time of this writing, it appears more than likely that a government shutdown is imminent. Obviously this causes confusion and further uncertainty; two things markets abhor. Indeed, the timing of this latest debacle couldn’t have been worse. We have the Federal Reserve announcing further rate hikes and a reaffirmation of its quantitative tightening (QT) program. Markets are grappling with a global trade dispute (albeit with some signs of moderation). And now it looks like we’re headed for a government shutdown with no clear path towards resolution.

As is often the case, the media does a great job of creating eye-catching headlines, but what does this government shutdown actually entail?

The first thing to keep in mind is that even if a compromise is not reached, most of the government is already funded. At issue are seven spending bills, including the contentious Homeland Security appropriations bill, which governs funding for border security and a potential wall.

Unlike past shutdowns, only a quarter of the government would be affected. Still, hundreds of thousands of government employees will be furloughed. In past incidences, Congress has approved back pay, but it is not guaranteed. It also presents a serious problem for many people living without much savings.

Some government services would come to a halt, and others would be cut back. However, with three quarters of the government already funded, essential programs are meant to remain intact. These include:

• Social Security, Medicare, and Medicaid
• The US Postal Service
• Veterans hospitals and benefits
• Food stamps
• The military
• Border patrol
• Air traffic control and TSA
• The federal judiciary
• Washington, DC

Every agency has its own contingency plan set up in case of a shutdown that could see some pauses or breaks in service. These include:

• National parks
• The IRS
• State Department services
• Environmental and food inspections

President Trump also has the ability to determine whether any service is “essential” — so it’s possible he could try to shut down a key government function like air traffic control if he really wants to make a point.

While investors are understandably rattled by the uncertainty associated with a possible government shutdown, we would note that we have a precedent for such events. We had a government shutdown in 2013. It lasted 16 days. While the stock market dipped initially on the news, once it became apparent that the shutdown was relatively short-lived, the market quickly recovered and went on to make new highs.  From today’s perspective, the incident barely registers as a tiny blip in an otherwise ongoing bull market for stocks. Of course, should we get a shutdown again, we don’t know exactly how things will transpire. Things could be different this time. But, our best guess is that a shutdown this time will likely be similarly short-lived, and have little long-term impact on the financial markets.

With the Christmas holiday, we have a rather light week in terms of the volume of economic indicators. The Chicago PMI data are highly anticipated as this is a key leading indicator of economic strength. The last print was a very strong 66.4 (any number above 50 indicates expansion), and it will be interesting to see if the strong economic fundamentals are holding up in the face of the market sell off.

Data deck for December 24-28: