Wall St. Shrugs Over Government Shutdown Risks

With Washington aflutter over the rising likelihood for a government shutdown, Wall Street’s reaction amounted to little more than a shrug.

It’s not that investors don’t care. They’ve just got more pressing concerns, from slowing growth to the trade war and the Federal Reserve’s next moves on interest rates. And going by history, a work stoppage would do little to dent the market mood. In each of the previous five shutdowns going back 23 years, the S&P 500 Index has posted gains throughout, according to data compiled by LPL Financial.

“Although government shutdowns get a lot of press, stocks take them in stride,” said Ryan Detrick, a senior market strategist for LPL. “What is rare is the fact this would be the third shutdown this year. You have to go back to 1977 the last time we saw three shutdowns during the same year.”

The threat of a stoppage grew more ominous on Tuesday during a heated Oval Office meeting where President Donald Trump said he’d “shut down the government” if Congress withheld funding for a border wall. The brash statement contributed to a midday slide in the S&P 500. Stocks surged Wednesday by 1.7 percent amid signs the trade war with China was easing, even as the prospects for a shutdown increased.

“Markets are looking for companies that grow, and for better or worse, government is overhead in the model of how things work,” said Kim Forrest, a senior portfolio manager at Fort Pitt Capital Group. “It doesn’t necessarily factor all that much into whether or not we buy or sell.”

Investors can also point to two prior stoppages this year that did nothing to harm equities. January started with a partial shutdown, and in the weeks leading up to and following the closure, the S&P 500 gained more than 3.5 percent to cap the strongest month since 2016. Another shutdown, which last just one day, followed in February, and the gauge rose 1.5 percent.

If the latest showdown results in a stoppage, impact would be relatively small compared to previous occurrences. Congress and President Trump have already approved a majority of the money needed to run the government, limiting the number of agencies that would close.

“I don’t expect any significant sell-off if the government shuts down,” said Kristina Hooper, chief global market strategist at Invesco Ltd. “We have to keep in mind that this would be a partial shutdown, so it’s not as significant — and it’s far from a ‘done deal’ that there would even be a shutdown.”

The last shutdown before this year was in October 2013, and that was the first in 17 years. Then, the political back-and-forth was over funding for Obamacare, and markets largely shrugged it off. The S&P 500 slid 2 percent in the immediate aftermath before reversing to gain 1.8 percent by the time a stop-gap bill was signed. Bonds also took it in stride, with 10-year yields adding just five basis points during that span.

A shutdown might not necessarily be without consequence for U.S. equity markets that have been lurching from rout to rally with frequency not seen in years. For Amplifying Global FX Capital founder Greg Gibbs, the threat is one more event to tack onto a list of market uncertainties.

Although the currency market is now focused on developments in Europe — Brexit bluster in the U.K. and protests in France among them — that could change if Congress doesn’t fund the government just days after the Federal Reserve is expected to raise rates again.

“Rising political risk in the U.S., coming around the time that the Fed meets to decide on its rates policy on 19 December, could undermine the USD and U.S. asset markets,” Gibbs wrote in a note Wednesday. “The EUR may be pressing supports today on political uncertainty in Europe, but it could quite conceivably be busting resistance in the days or weeks ahead as focus shifts to U.S. rates and politics.”