The United States government officially shut down on Wednesday, the first such shutdown in seven years. Lawmakers were unable to find a mutually agreeable package for a funding bill, resulting in the shutdown. In effect, federal agencies this year no longer have the money to do their jobs. The current 1976 record of 20 government shutdowns has been an average of eight days in length.
With all this uncertainty, investors ran to safe-haven assets. It’s worth noting that gold and silver prices shot up leading right up to and after the shutdown went into effect. Even with this trend, the market was unnaturally quiet. Most investors appeared not to notice the prospect of a lengthy government shutdown.
Market Trends Ahead of Shutdown
Before the shutdown news was announced, Dow futures were already down 219 points, or 0.47%. Futures on the S&P 500 dropped 0.5%, while Nasdaq 100 futures dipped 0.6%. After an extremely bullish market performance to start the week there was a strong bearish reversal. On Tuesday, the Dow closed above 27,000 for the first time ever. The S&P 500 had five months of positive returns in a row as well, climbing 3.5% in September—the best monthly return since 2010.
“We don’t think that the market appreciates the risk of a stickier, more contentious shutdown,” – Buchanan
Market analysts have noted that while there is some concern regarding the impact of the shutdown on economic performance, many investors have largely chosen to focus on other factors, such as corporate earnings and economic trends.
Historical Context of Government Shutdowns
The current shutdown is especially remarkable since it has become one of the most surreal moments in U.S. legislative history. Other than a handful of long-lasting shutdowns since the practice began in 1976, those interruptions are frequently temporary. The average shutdown lasts about eight days. As historical context, the S&P 500 has usually recovered like gangbusters after those things. In fact, on average, the index has increased 1.2% in the month after a shutdown ended along with 2.9% of growth in the three ensuing months.
“We believe that a shutdown will have only a small and transitory economic impact, but it may spur some financial market volatility,” – Jennifer Timmerman
The short-term impacts on federal government operations are obvious. As an economic recovery still underway, economists think if a resolution happens early the long-term effects will be short-lived.
Investor Perspectives and Future Outlook
Experts have differing views on how to move to this new exciting period of uncertainty. As to whether this is a market phenomenon or something else, Teal concluded that he sees it more as a political than a market event. He advises investors to pay attention to macro-economic indicators. More importantly, they shouldn’t allow fears of a shutdown control their strategies.
“We advise investors to look past shutdown fears and focus on other market drivers,” – Ulrike Hoffmann-Burchardi
Adam Turnquist agreed, stating that investors have focused more on corporate earnings and macroeconomic measures than budget-related turmoil.
Investors are understandably looking forward with some trepidation. They have to sort through the fear-mongering about potential digital currency chaos with the effects of Federal Reserve policy moves and overall business trends. The current environment suggests that while volatility may arise from this shutdown, many market participants remain optimistic about underlying economic fundamentals.