How the Ongoing Shutdown Could Affect the Market

January 25, 2019  |  Michael Reilly

We’re now entering into the longest government shutdown on record, which has some investors wondering if it might affect their portfolios. Domestic equities have been topping the relative strength charts for a long time, and nearly every investor has cash tied up in US-based stocks…but is there really any cause for concern?

It’s true the effects of a government shutdown are fairly wide, affecting everything from the Departments of Energy and Agriculture to the IRS and SEC. With such widespread reach, is there any risk of the effects of the shutdown bleeding into and having an impact on some sectors of the market?

Well the good news is that, historically, government shutdowns have no noticeable impact on the market. In fact, past shutdowns have usually seen small rises in the S&P during the time the government was technically shut down.

When LPL Financial conducted a study spanning the previous 18 shutdowns from 1976 to 2013, they found that the median change in the S&P 500 over the course of the shutdowns was exactly 0.0%. This is fairly interesting considering that the SEC, the primary regulator of the financial markets, only has about 6.5% of its employees reporting for work during shutdown conditions.

A study previously conducted by the Congressional Research Service, which studied the 2014 shutdown, found that each week of government shutdown cost the US economy 0.1 percentage points of GDP growth. While that’s not an insignificant amount of money, it pales in comparison to how the GDP is affected by other factors like our ongoing trade disputes with other major world players. If you really need to pay attention to political events that may potentially affect your portfolio earnings, these are much more significant factors to watch out for.

Remember, stock prices over short periods of time are more or less “random”, which is why long term investing has always been a much safer and more reliable approach. After all, stock prices are largely driven by long term expectations, not short term events or sudden occurrences. When we define “long term” in relation to the market, we look at periods of time spanning several years. It’s safe to assume that the government shutdown won’t be a “long term” event by market standards, even though we are currently entering the longest shutdown in US history.

That’s not to say that some sectors of the economy will escape completely unscathed. One of the most prominent effects of the shutdown is that US airline stocks have dropped as difficulties emerge in keeping TSA employees and air traffic controllers operating at full efficiency without pay. As of this writing, United, Delta, American, and Southwest have all fallen between 2% and 4%, with Delta nearing its year low of 45.08.

This brings us to another worthwhile point, which is that there is one major way the government shutdown could ultimately affect some stocks…and it has to do with how the whole thing will be resolved.

Specifically, if the shutdown ends with funding for the wall (or some version of it) being secured by the Trump administration, there’s a good chance at least a chunk of that money will be funneled into companies that individual investors have access to.

Specifically, you may want to keep your eyes on contractors the US has previously used to provide work on structures at the US border, materials companies, construction equipment companies, and cement and steel manufacturers.

Of course, at this time this is all just speculation, and it seems that things could go either way when it comes to the shutdown’s resolution. But, if you want to look at the most significant potential impact of the shutdown on the stock market, this is probably the area you’ll want to keep your attention on.

Michael Reilly

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