Shutdown Metrics

December, 2018

 

We are told that one reason stocks have been going down lately is the threat of a government shutdown, which seems almost probable if the President’s recent statements are to be taken at face value.  The U.S. President is on record as embracing a government shutdown on Friday, December 21 unless he receives full funding for his border wall with Mexico.  This seems unlikely, so it might be time to ask: If the government shuts down, what is actually likely to happen?

 

An article on the ZeroHedge website offers some news that might surprise most of us.  First: government shutdowns have been more common than we might realize.  In all, there have been 20 government shutdowns since October 1, 1976:

 

October 1-10, 1976

October 1-12, 1977

November 1-8, 1977

December 1-8, 1977

October 1-17, 1978

October 1-11, 1979

November 21-22, 1981

October 1, 1982

December 18-20, 1982

November 11-13, 1983

October 1-2, 1984

October 4, 1984

October 17, 1986

December 19, 1987

October 6-8, 1990

November 14-18, 1995

December 6, 1995 - January 5, 1996

October 1-16, 2013

January 20-22, 2018

February 9, 2018

 

The article notes a few things to remember.  First, Congress can avoid a partial shutdown by passing another continuing resolution—following the continuing resolution in September that temporarily funded 7 out of 12 total appropriations into December.  If the President were to veto that resolution, then a two-thirds majority in both the House and Senate could override the veto.

 

What about the other 5 of the 12 appropriations?  Those—Energy & Water; the Legislative Branch; Military Construction and VA; the Department of Defense; and Labor, Health & Human Services—represent 75% of discretionary government spending—basically 75% of the money spent that is not related to Social Security, Medicare or other entitlement programs.  Those programs are fully funded through September 30, 2019. 

 

So what appropriations would the shutdown actually impact?  The seven that still have to be authorized are Agriculture; Commerce, Justice and Science; Financial Services and General Government; Homeland Security; Interior and Environment; State and Foreign Operations; and Transportation and HUD. 

 

What would be the economic impact of this potential partial shutdown?  The report estimates that for every day of a full shutdown, American GDP is reduced by 2.4 basis points, or 0.024%.  But since only 25% of the government would be inoperable, the impact in this case would be about 0.008% per day. 

 

Put another way, each month would reduce American economic growth by about half a percent.  That, of course, is unlikely to happen.

 

What have the markets done during past government shutdowns?  The data show that the average market move for the S&P 500 index, in the week of a government shutdown, is down 0.06%—which I think most of us would regard as virtually unchanged.  The two weeks during and after a shutdown, the markets averaged down 0.13%.  More interesting is the fact that the one-week data shows that only 47% of the time did the market go down.  More interesting still, in the month after the shutdown, the average price move was UP 0.25%.

 

Nobody is saying that a government shutdown is good for stocks, or that shutting the government down is a great way to shake the market out of its current tailspin.  But it probably isn’t a good idea to panic about the market impact of a shutdown either.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

Source:

 

https://www.zerohedge.com/sites/default/files/inline-images/19%20govt%20shutdowns.png?itok=UIGSm3fB

This material was prepared by BobVeres.com., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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