How a Government Shutdown Can Affect the Stock Market

government shutdown

The US government has shut down again on December 22 just this past year, albeit partially, due to Congress not being able to agree on a funding deal for keeping it running. The shutdown is primarily in most part due to President Trump’s insistence upon a funding bill he’s requesting in the amount of five billion dollars for building a wall between the Mexican and American borders.

However, Congressional Democrats have refused to honor his request. Because of this disagreement, the government has been partially shut down for an undetermined amount of time.

Given the recent volatility of the stock market, the week leading up to the government shutdown was brutal for stocks, with Nasdaq falling into a bear market and both the DJIA and S&P 500 descending deeply into a correction. Although the shutdown wasn’t the direct cause of the markets fall, it sure hasn’t helped them either.

With Trump seemingly not considering budging from his position in order to get government back to work, it could end up further bringing the market down. However, if history is any indication, it may bring the markets back up as well.

What Does This Government Shutdown Mean?

For starters, this particular shutdown means that four hundred thousand federal workers are going without pay until a resolution is reached with some having still having to work. Some government offices and services are closed, such as parts of both the SEC and IRS. So that there is no impact on securities trading and market operations, most financial regulatory services remain open, however. Additionally, the military remains open as well due to a resolution being passed earlier last year.

Most federal offices have closed, only keeping what’s considered to be “essential” personal, which depends on the service or department and type of employee. For example, as previously mentioned, part of the IRS will be included in this shutdown; with a staff of over eight thousand, only a small amount of workers will remain on staff.

Nonetheless, more IRS workers will keep working given the upcoming tax season, as opposed to the Securities and Exchange Commission (SEC), which is the primary regulator of financialmarkets, which will only see about seven percent of its employees working during the shutdown.

The entire government will not completely stop; you will still get your mail and banks will still be open. Those on Social Security will still receivetheir payments on time. Of course, the Department of Homeland Security will still be operational as well, although the department may lose up to thirteen percent of its staff. However, for the most part, most government functions will continue uninterrupted. For those who aren’t employed by the government, it’s most certainly business as usual.

How Does a Government Shutdown Affect the Stock Market?

Americans actually were party to a government shutdown just a year ago, on January 20, when Congress failed to pass a government funding bill. The shutdown lasted until February 16. Ths shutdown, which was actually foreseen by the market due to disagreements over immigration policy, caused the S&P 500 to veritably raise almost a half a point. Overall, according to other shutdowns, the market generally ends up higher at the end of the shutdown.

The current shutdown may well be resolved shortly, hopefully, but it’s reassuring to look back at other government shutdowns and how they affected the stock market. Besides the current shutdown and the one mentioned from last year, the US government has been shut down for more than one trading day only three times. As a matter of fact, all three times the stock market was not only unaffected but actually ended up gaining all three times.

Short Summary of Past Shutdown and the Stock Market

The first shutdown, which was during 1995, (November 14 to 19), President Bill Clinton and Newt Gingrich bitterly disagreed about the budget, causing the first “real” government shutdown. This was the first time in which a number of departments and agencies were closed for longer than a day. Although the S&P 500 declined on the first day, it actually rose about 0.8% overall, making for a nice return at the end of the shutdown.

The second shutdown was actually later the same year (1995), the next month, to be exact, from December 16 to January 6, 1996. Fewer federal employees were furloughed this time, however. As with the shutdown the previous month, stocks fell initially, but ultimately ended up gaining by the shutdown’s end. Keep in mind; this shutdown even happened during the Christmas season, and the stock market was closed in observance of both Christmas and New Year’s Days. Even so, stocks gained about 0.3%.

Lastly, after almost eighteen years of peace in working out the budget in Congress, the US government was once again shut down for a brief time during 2013 for October 1-16. A large number of federal employees were furloughed, as many as eight hundred and fifty thousand at its peak, and another almost million and a half were made to work without knowing if they’d get paid or not. This shutdown was due to fights over “Obamacare,” which, although ugly within Congress, Wall Street could care less. Stocks ended up 3.1% higher the day after the shutdown ended.

Final Thoughts

During all of these government shutdowns the results were mixed with the major theme being it didn’t play a huge impact on the markets. So don’t go pulling all your money out of the market just because we are partially shutdown at the moment!