What is the Government Shutdown's Impact on the Market and Economy?
January 21, 2019
By Tom Limoges
Trust Investment Officer
We are now over a month into the partial government shutdown that is currently affecting 800,000 federal employees. While the impact on federal employees' lives and families is substantial, the economic and market impact is more muted. What is the impact of a prolonged shutdown, and how does that affect the economy and markets? Let's take a look:
The Shutdown’s Impact on Economic Growth
One area that a prolonged shutdown will affect is economic growth. Gross Domestic Product, or GDP for short, is a measure of the value of goods and services produced in a specific period of time. It is compared against the previous year to determine growth. Because of the partial shutdown, the official release of the GDP number for 2018 could be delayed.
Looking ahead to the 2019 numbers — the chart below illustrates that the longer the shutdown drags out, the larger the impact grows:
However, even though the impact on the economy will widen as the shutdown continues, the broader effects will not likely be as pronounced ...
The Shutdown’s Impact on the Stock Market
There is an old saying in the investment world that the stock market “climbs a wall of worry.” The meaning of this old adage is that despite the negative issues, the stock market remains resilient and rises over time. This statement remains true today. In today’s market environment, the partial shutdown is one of a handful of negative blocks in that wall that are still unresolved.
How has the stock market behaved during other government shutdowns? The government has partially shut down three times in recent years. During each of those time periods, the market advanced from start to finish. In fact, the markets have advanced 10.7% during the current government shutdown (as of last Friday, Jan. 18).
So, while the shutdown has created news headlines, it has not negatively impacted market returns thus far:
The Shutdown and Your Portfolio:
Over the last month, we have received questions from clients regarding whether changes should be made to their investment mix as a result of the partial shutdown. Adhering to your financial plan and staying diversified is the best advice in periods of market volatility. We believe the impact of a government shutdown will affect economic growth, the longer it drags into the first quarter. However, this impact will be short-lived and possibly recouped later in the year.
To conclude, Security National Bank would like to thank local government employees for their commitment to public service, especially in this challenging environment. If there is any way we can be of service, please don’t hesitate to reach out to us.