The U.S. government appears headed for a shutdown as lawmakers deadlock over the nation's budget for the next fiscal year. But Wall Street bosses don't seem worried about the impact on the U.S. stock market, and they think investors will most likely be fine.
To avoid a government shutdown, Congress needs to pass all 12 spending bills for the next fiscal year by Sept. 30, a historically bumpy process for Congress. The last time the U.S. was able to pass all of its spending bills on time was 1997, according to an analysis by Charles Schwab.
According to Alec Phillips, chief political economist at Goldman Sachs Research, the chances of a government shutdown have exceeded 50 percent, and so far the government has not passed any spending bills as policymakers argue over government budget constraints.
That could spell trouble for markets, which could be hit immediately by a government shutdown. September is already on track for its biggest monthly decline since the start of the year. The last time Congress failed to reach a deal on a budget in time, the S&P 500 fell 2.7 percent on the first day of the shutdown, according to Renaissance Macro.
But at the same time, there are encouraging signs that investors will be able to recoup their losses quickly.
In the past 20 shutdowns, the S&P 500 has remained relatively flat, with the benchmark index falling an average of 0.4% in the week leading up to the shutdown and rising 0.1% when it ended, according to CFRA Research.
In some cases, stocks actually moved higher at the end of the shutdown, with the market up a net 10 percent after the 2018-19 shutdown, according to Renaissance Macro.
According to a Dow Jones 2021 analysis, a shutdown lasting five days or more can also cause the market to rebound quickly. On average, the S&P 500 has moved into positive territory within a month of a shutdown.
"We believe the immediate effects of past government shutdowns were quickly reversed after the government reopened, so any pullback in equities is likely to be muted," strategists at Wells Fargo said in a recent note.
Rising risk of recession
While the shutdown may not be a major drag on markets, analysts worry it could exacerbate other factors weighing on the U.S. economy in the coming quarter. These include a weak labor market, rising interest rates and a recovery in student loans, which could weigh on the U.S. consumer and increase the chances of a recession.
Goldman Sachs estimates that the shutdown could drag on economic growth, knocking 0.2 percentage points off quarterly GDP from a year ago for every week it lasts. The bank said it expected the shutdown to last two to three weeks.
"I don't think the shutdown itself is a major issue from an equity market perspective," Keith Lerner, co-chief investment officer at Truist Financial, said Monday. quot; But I don't think the challenge for the market right now is any one thing, the lack of an 'upside' catalyst for equities.
"We encourage investors to prepare for a near-expected recession by looking beyond the market's twists and turns in the weeks leading up to, during, and following a potential government shutdown, in keeping with our more defensive portfolio guidance," Wells Fargo strategists wrote in a note.