- The government shutdown just became the longest on record, entering into a 23rd day on Sunday.
- Past government shutdowns have not typically had a meaningful impact on the stock market or economic growth, Wall Street economists and market strategists say.
- But a partial shutdown dragging on could delay trade talks between the US and China, and contribute to an element of uncertainty that could upset markets.
The government shutdown won’t impact the stock market or the economy – until it does.
That was the crux of Wall Street’s outlook this week as the partial US government shutdown over funding for President Donald Trump’s proposed wall on the southern border was on track to become its longest on record. The shutdown broke the record on Saturday, and extended to a 23rd day on Sunday.
Experts say while past shutdowns have indeed had a benign impact on stocks and economic growth, risks around US-China trade talks, consumer sentiment, and the market’s performance are not off the table.
“We think a deal will be reached to reopen the government, but only after economic, financial and/or political pain is felt,” Bank of America Merrill Lynch economists led by Michelle Meyer told clients on Thursday. “Every two weeks of a shutdown trims 0.1pp from growth; additional drag is likely due to delays in spending and investment.”
Looking back to prior shutdowns, Bank of America found the “general rule of thumb” is that the direct impact felt by a shutdown is roughly a 0.1 to 0.2 percentage-point drag on growth per week. That led them to lower their own forecast for fourth-quarter GDP to 2.8% from 2.9%.
“Additional drag could be felt if the shutdown generates uncertainty shocks in the economy leading to a decline in business and consumer sentiment and/or a decline in US equity markets.”
To be sure, it’s well documented that stocks tend to take government shutdowns in stride. Rarely has a shutdown pushed stocks down in a meaningful way, according to an analysis from LPL Financial Research. Shutdowns have corresponded with a flat median return in the previous 20 shutdowns going back over 40 years, LPL found. Since the shutdown began on December 22, the S&P 500 has gained 7.4%.
An ongoing shutdown could even influence the Federal Reserve’s interest-rate hiking path at a time when uncertainty persists around future rate hikes.
“With economic growth set to hold up fairly well in the near term we continue to expect up to two more rate hikes in the first half of this year,” Nikhil Sanghani, assistant economist at Capital Economics, told clients earlier this week. “But a renewed plunge in the stock market or more serious disruption resulting from the government shutdown would probably take any further hikes off the table.”
More granularly, the manufacturing and services sector could feel the pain as a result of the shutdown. The shutdown negatively impacting the purchasing manager’s index (PMI) – a widely followed economic indicator – was among Fundstrat Global Advisors’ eight listed risks to the firm’s otherwise bullish 2019 outlook.
Others view the shutdown as more a more benign event. Economists at UBS do not view it as a major macroeconomic risk, they told clients in a note out Friday.
“In the past two major government shutdowns, private employment and consumer spending were unaffected,” a team led by Samuel Coffin wrote. “There were some increases in initial jobless claims in states with a lot of Federal employees, but they did not spill into longer deterioration.”
Even still, the current shutdown will have “larger effects the longer it goes on.”