U.S. Government shutdown averted … for now
Author: Sam Mitter
December 12, 2017
With developments around U.S. tax reform creating a positive distraction in Washington, another significant unresolved issue looms – the 2018 Budget Bill.
U.S. Congress averted a government shutdown, set to take effect December 8th, by moving swiftly to write a short-term funding bill last week and extending the deadline to December 22nd. The extension allows Republicans and Democrats an additional two weeks to debate budget differences. Among the most controversial issues, the Republicans are planning a large increase in defense spending, though the Democrats argue this should be matched with spending in other domestic programs. On the Democrats agenda is guaranteed protection for nearly 700,000 undocumented immigrants who were children when brought into the U.S., the Obama-era program entitled Deferred Action for Childhood Arrivals (DACA). Considering President Trump’s tough stance on immigration thus far, a resolution does not appear imminent. These issues, adding to an already busy schedule before the holiday break, suggest a government shutdown is very much a possibility.
Interestingly, markets have acted rather apathetically towards government shutdowns in the past. On average, past shutdowns have lasted only about a week and resulted in a modest -0.5% decline in the S&P 500. Indeed, stocks actually rallied during the most recent shutdown in 2013.
Perhaps one reason for this general lack of concern is that market participants see through to what a shutdown actually entails. Certain government functions cease to operate, including the likes of NASA, national parks and passport issuance, however the essential services of national safety, social security and Medicaid payments are continued regardless of stalled budget bill. Further, upon a shutdown, closed agencies first deplete all excess and saved funds, allowing some to continue operations for upwards of two weeks. With the average shutdown lasting only seven days, disruption to GDP is often minimal.
Duration of Government Shutdowns / Funding Gaps: FY1977-FY2014
Source: Strategas Research, December 2017
S&P 500 Performance During Shutdowns / Funding Gaps: FY1977-FY2014
Source: Strategas Research, December 2017
Importantly, the budget is only one of many moving parts in Washington that directly impact stock markets. This is especially true today, with investors reacting to coinciding Fed rate hikes and the growing potential for tax reform. In any event, while an agreement on spending before the December 22nd deadline would be the best scenario, a short-term shutdown may carry some positive effects as well. If the government shuts down, it also needs to re-open, signalling a positive message for markets that compromise can be accomplished. Additionally, the re-opening of government requires bipartisan cooperation, which could fuel hopes for more agreement across the aisle, another market-friendly indication. With the Trump administration making very little progress on a number of initiatives thus far, a budget agreement of any kind could be positive for markets leading into 2018. And if you are expecting a potential government shutdown to trigger a market correction in the next couple of weeks, you may be disappointed.
Commentaries contained herein are provided as a general source of information based on information available as of December 11, 2017 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
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