Government Shutdowns and Investors: Staying Steady Amidst Political Turbulence

Introduction

In the world of investing, uncertainty is a constant companion. But when political gridlock in Washington leads to a government shutdown, it can send ripples of anxiety through the financial markets. However, history shows that while government shutdowns make headlines, they often have little lasting impact on investors. In this blog post, we’ll explore the relationship between government shutdowns and investors, discussing why you shouldn’t let political drama dictate your investment decisions.

The History of Government Shutdowns

Over the past four decades, the U.S. federal government has experienced a series of shutdowns due to Congress failing to appropriate the necessary funds to keep it running. The first government shutdown occurred in 1981, lasting just one day, and since then, there have been ten shutdowns, including a significant 5-week-long shutdown in 2018. As we approach October 1, there’s a high likelihood of another shutdown, according to Alice Joe, Fidelity’s vice president of federal government relations.

Investor Resilience

The good news for investors is that past government shutdowns have had little impact on their portfolios. Jurrien Timmer, a Global Macro Strategist, analyzed the performance of the S&P 500 during the 100 days before and after the two longest shutdowns (2013 and 2018). In both cases, stocks actually rose strongly in the 100 days following the shutdowns. Timmer expects this pattern to repeat if the government shuts down again in October.

What this history reveals is that market participants understand that short-lived political drama, while headline-grabbing, doesn’t significantly affect corporate earnings, which are the primary drivers of stock prices. Therefore, investors should resist the urge to react impulsively to shutdown news.

Economic Implications

While government shutdowns may not have a lasting impact on stocks, they can affect the broader economy. The federal government plays a significant role in the U.S. economy, spending vast sums on goods, services, and other activities. A prolonged shutdown could result in a measurable reduction in economic activity.

This reduction comes at a challenging time, as the U.S. economy is currently in the late phase of the business cycle, a period often marked by slowing economic growth that can lead to a recession. Dirk Hofschire, head of Fidelity’s Asset Allocation Research Team, acknowledges that a government shutdown would be a small drag on the economy. However, he emphasizes that it wouldn’t be the sole cause of a recession, though prolonged shutdowns could exacerbate economic damage.

The Impact on Business and Consumer Confidence

Beyond the direct financial consequences of government workers and contractors not getting paid, a shutdown introduces uncertainty that can harm business and consumer confidence. When companies and consumers are unsure when government services will resume, it becomes challenging to make investment or spending plans. This uncertainty can contribute to market volatility.

Hofschire notes that while the near-term odds of a U.S. recession remain low, late-cycle periods are characterized by ups and downs in financial markets and increased volatility. An October government shutdown would add another layer of uncertainty to an already volatile market environment.

Maintaining Your Investment Strategy

In conclusion, the prospect of a government shutdown may generate worrisome headlines, but it should not lead to hasty investment decisions. If you’ve already established an investment strategy aligned with your goals, financial situation, timeline, and risk tolerance, you’re likely well-prepared to weather political storms.

The key takeaway here is that while government shutdowns may have economic implications, they have historically had little lasting impact on investors and financial markets. Staying disciplined and avoiding knee-jerk reactions to political events is often the best approach to safeguarding your financial future. Keep your focus on your long-term goals, and remember that patience and a well-thought-out strategy are your best allies in uncertain times.