Here is some information regarding the recent U.S. government shutdown and its potential implications on the financial markets. It's understandable that events like this can raise concerns, but I want to reassure you about its minimal impact on your long-term financial goals.
What Happened
Under a process that has been in place since the mid-1970s, Congress must pass 12 individual spending bills by October 1, the start of the government’s fiscal year. This has happened only five times, with stopgap spending bills required to keep the government open.
However, despite a last-minute flurry of negotiations over government funding and expiring health care subsidies, Congress was unable to pass a stopgap spending bill before the current U.S. Government funding laws expired at 12:01 a.m. Wednesday morning.
This shutdown means many federal agencies will temporarily shutter; military service members, government contractors, and most government employees won’t be paid; and antipoverty programs will run out of money. However, social security payments, tax collection, mail delivery, and air travel won’t be affected—though employees in these areas will go unpaid—potentially leading to staffing issues.
Government shutdowns are not uncommon. Since 1975, there have been 21—the last one was in December 2018 and lasted a record 34 days—and they generally caused minimal economic and financial disruption.
Implications of the Government Shutdown
- Economic Implications: Based on history, most economists believe a brief shutdown will not slow the economy significantly or push it into recession.
- Only discretionary spending would be affected, which represents just a quarter of the federal budget. Mandatory spending on programs like Medicare and Social Security is not impacted.
- Almost 2/3 of federal employees are likely to be considered essential and will continue working during a shutdown (though without pay).
- Some members of the Administration have discussed firing a number of Federal workers as part of the shutdown. For now, this seems unlikely.
- The federal payroll amounts to roughly 2% of Gross Domestic Product (GDP).1
Key economic data may be significantly delayed, or unavailable, including the monthly jobs report, key inflation figures, and reports from agencies such as the Census Bureau and Bureau of Economic Analysis, leaving economists and policymakers without important information on the health of the economy.
Economists estimate that a shutdown would reduce growth by about 0.2% for each week it lasts.2 However, growth typically rebounds by the same amount once a shutdown ends and Federal workers receive back pay.
But a longer shutdown could have a more significant impact on growth.
- Political Implications: The political stalemate in Washington that led to this shutdown could rattle investors and push up yields on Treasury bonds, leading to higher borrowing costs.3 The party seen as responsible for a shutdown typically faces increasing political pressure.
- Market Volatility: In the short term, we may see some increased volatility in the financial markets as investors react to the uncertainty—especially if yields on Treasuries increase.
Keep in mind, however, that the average performance of the S&P 500 during all the shutdowns since 1975, was 0.1%—essentially flat.4
How the Shutdown Ends
As a shutdown goes on, political pressure will steadily start to ratchet up. The media, businesses, state legislators, constituents, and donors will focus relentless attention on the economic and human cost—unpaid Federal workers struggling to get by, welfare recipients left to fend for themselves, Federal contractors not getting paid, government offices and national parks shuttered, much of the business of government suspended.
Historically, pressure has often led to compromises, and while the shutdown may have caused significant disruption, it's important to consider the potential for lasting damage.
Your Long-Term Financial Goals
It is important to remember that your investment strategy is based not on short-term events and headlines but on your long-term financial objectives, which take into account market fluctuations, political and economic conditions, and the long-term potential of markets around the world.
If you have any questions about your investments, your plan, or the current situation, please don't hesitate to reach out. Our team is here to provide guidance, answer questions, and address any concerns you may have. We at Henry Wealth Management remain committed to helping you navigate through changing market dynamics.
Thank you for entrusting us with your financial future.
[1] :”How Much Does a U.S. Government Shutdown Cost the Economy?” Goldman Sachs, September 1, 2023, www.goldmansachs.com/intelligence/pages/the-cost-of-a-us-government-shutdown.html
[2] Ibid.
[3] Tankersley, J. and Ngo, M., “U.S. Government Shutdown Is Unlikely to Cause an Immediate Recession,” The New York Times, September 27, 2023, www.nytimes.com/2023/09/27/us/politics/us-government-shutdown-recession.html
[4] Emmy, R., “Will a Government Shutdown Hurt Your Investments? ‘The Headline Answer Is No,’ Says Analyst,” CNBC, September 27, 20203, www.cnbc.com/2023/09/27/will-a-government-shutdown-hurt-your-portfolio.html