{"id":6209,"date":"2023-09-03T11:03:11","date_gmt":"2023-09-03T11:03:11","guid":{"rendered":"https:\/\/prosfunds.com\/news\/congress-returns-to-face-shutdown-fears-heres-what-it-means-for-markets\/"},"modified":"2023-09-03T11:03:12","modified_gmt":"2023-09-03T11:03:12","slug":"congress-returns-to-face-shutdown-fears-heres-what-it-means-for-markets","status":"publish","type":"post","link":"https:\/\/prosfunds.com\/?p=6209","title":{"rendered":"Congress returns to face shutdown fears \u2014 here\u2019s what it means for markets"},"content":{"rendered":"

U.S. lawmakers are due to get back to work Tuesday on Capitol Hill, and there are growing expectations that one fruit of their labors will be a partial government shutdown.<\/p>\n

\u201cMy guess is that we will have a lot of screaming and shouting, and we\u2019ll end up shutting down the government, and a lot of people will be inconvenienced or hurt as a result of doing that, but we\u2019ll do it,\u201d said Republican Sen. Mitt Romney of Utah in an interview with a TV station<\/a> in his home state. <\/p>\n

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\u201cAnd by the way, we\u2019ll shut down government, and then we\u2019ll open it. It\u2019s not like that means that we win. No, no. We just shut it down to show that we\u2019re fighting and making noise.\u201d<\/p>\n

Investors should view the shutdown as largely noise, according to a number of analysts in Washington, D.C., who track lawmakers\u2019 moves for Wall Street.<\/p>\n

\u201cThe stakes here are significantly lower than they were back in June, when we were facing default,\u201d said Ed Mills, Washington policy analyst for Raymond James, referring to lawmakers\u2019 efforts to reach a deal on raising the U.S. debt ceiling in order to avoid a market-shaking default.<\/p>\n

\u201cFor the most part, this is a 1 or 2 on a scale of 1 to 10 in terms of concern,\u201d Mills told MarketWatch, adding that a U.S. default, on the other hand, would have registered as a 10 on that scale.<\/p>\n

There have been six government shutdowns since 1978 that lasted five days or more, and the S&P 500 stock index
\n SPX
\n gained in the four most recent shutdowns. Brian Gardner, chief Washington policy strategist at Stifel, emphasized that history in a note to clients.<\/p>\n

\u201cHeadlines regarding a potential budget impasse will grow and there could be a whiff of panic in the air, but investors should take all of this in stride. Markets tend to ignore the impact of a government shutdown,\u201d Gardner wrote, as he offered the chart shown below.<\/p>\n

<\/p>\n

<\/p>\n

<\/p>\n<\/figure><\/div>\n

From MarketWatch\u2019s archives (September 2021):<\/strong>\u00a0Here\u2019s how the stock market has performed in past government shutdowns<\/p>\n

And from January 2019:<\/strong> The latest government shutdown is ending, after becoming the longest on record \u2014 by a wide margin<\/p>\n

How government shutdowns can hurt<\/h2>\n

Stifel\u2019s Gardner said that while past shutdowns suggest that investors should not panic, there still is some damage.<\/p>\n

\u201cThere will be extensive media coverage of closed entrances at national parks and other government facilities.\u00a0 Government salaries will not be paid on time which is, certainly, a hardship for some families,\u201d he wrote.\u00a0At the same time, he emphasized that \u201cmuch of the country will operate as usual,\u201d including the military
\n ITA
\n and air traffic controllers \u2014 and missed paychecks will come through once the shutdown ends. <\/p>\n

From MarketWatch\u2019s archives (January 2019): <\/strong>How furloughed federal workers can rebuild their finances after the shutdown<\/p>\n

\u201cFrom a market perspective, the biggest concern relating to a government shutdown is that it could delay official government data reports at a pivotal time for the Federal Reserve,\u201d said BTIG\u2019s Issac Boltansky and Isabel Bandoroff\u00a0in a note.<\/p>\n

Related:<\/strong> Jackson Hole recap: Fed rate hikes likely on hold for \u2018several meetings\u2019<\/p>\n

The BTIG analysts said they expect a shutdown will occur but it should be a \u201cnonevent for markets\u201d overall, because it \u201cwould have no impact on debt payments and any missed activity would be settled on the other side of reopening.\u201d <\/p>\n

There could be a greater-than-anticipated impact on stocks
\n DJIA<\/p>\n

COMP
\n if the shutdown lasts for a longer time than expected, and if the deal to end the shutdown features unexpectedly large cuts to spending along with significant repeals of Democrats\u2019 Inflation Reduction Act, according to Mills, the Raymond James analyst.<\/p>\n

\u201cThe most likely scenario is that it\u2019s days, not weeks,\u201d he said, regarding the length of any shutdown. He also noted it could hit consumer confidence and disrupt the initial-public-offering process for some companies.<\/p>\n

What\u2019s likely to happen on Capitol Hill<\/h2>\n

Only one chamber of Congress is returning to Washington on Tuesday, the day following Labor Day, after an August recess \u2014 the Senate. The House of Representatives is slated to resume its work on Capitol Hill a week later, on Sept. 12.<\/p>\n

Ahead of their returns, the Biden White House\u2019s budget office has pushed for passage of a\u00a0short-term funding measure\u00a0to avoid\u00a0a partial federal government shutdown on Oct. 1, when the government\u2019s 2024 fiscal year starts. <\/p>\n

Such a measure is known as a continuing resolution, or CR, and they\u2019re often used as the House and Senate work to agree on a dozen appropriations bills that would fund government operations for a full fiscal year. <\/p>\n

The debt-ceiling deal negotiated between House Speaker\u00a0Kevin McCarthy and President Joe Biden set spending levels over the next two years, keeping nonmilitary spending for 2024 the same as 2023 levels. But House Republicans have adopted spending targets for the coming fiscal year at levels below the McCarthy-Biden agreement.<\/p>\n

McCarthy has raised the idea of a short-term funding bill with his fellow Republicans. <\/p>\n

\u201cThe thing that Kevin McCarthy is trying to tell his caucus is that we probably need to have a short-term CR, so that the House can finish its work on appropriations bills and establish the best negotiating position,\u201d Mills said.<\/p>\n

The House Freedom Caucus, a hardline GOP group known for causing headaches for the chamber\u2019s leaders, has voiced concerns. It said in an Aug. 21 statement that its members want to rein in outlays and will oppose any spending measure that doesn\u2019t include a House-passed bill focused on security at the U.S. southern border. In addition, the group said any spending measure must address the \u201cunprecedented weaponization\u201d of the Justice Department and the FBI, as well as end \u201cwoke policies in the Pentagon.\u201d<\/p>\n

The most likely path forward is the GOP-run House passes a short-term funding measure that incorporates House Freedom Caucus goals, and then there\u2019s a showdown with the Democratic-controlled Senate over those policy riders, with a short-lived shutdown potentially taking place, Mills said.<\/p>\n

The Raymond James analyst said the most likely deal is a budget that\u2019s in line with what was negotiated as part of the debt-limit deal. He also expects supplemental measures that provide relief for areas hit by Hurricane Idalia and the Maui wildfires, as well as some funding for Ukraine as it continues its fight against Russia\u2019s invasion.<\/p>\n

\u201cFor investors, they have seen McCarthy go up to the brink, go through a tough situation and be able to pull a rabbit out of it,\u201d Mills said, referring to his January battle to become House speaker and the spring\u2019s debt-limit talks. And they\u2019ve \u201cgone through government shutdowns in the past, mostly with very minimal market reaction,\u201d he added.<\/p>\n<\/p><\/div>\n