The U.S. government formally entered a shutdown on Wednesday, October 1, as the two parties could not reconcile differences in healthcare subsidies. Sadly, this is not the first time the government has shut down. In this article, we answer three questions on investors' minds to make sense of what's next.
During a shutdown, essential services such as the U.S.Postal Service, Medicare, and Social Security will continue to operate. The majority of federal employees continue working during a shutdown because the services they provide are likely to be deemed essential. On the other hand, non-essential services, which employ roughly 40% of all federal employees (750,000), will be furloughed, and services will be impacted according to an estimate from the Congressional Budget Office (CBO). Examples of non-essential services impacted include food assistance, select defense, the Bureau of Labor Statistics, which puts out the monthly job reports, and national parks, etc.
Shutdowns generally hurt economic growth as furloughed federal workers are less likely to spend money until their paychecks resume. However, the economy eventually recovers any lost growth after the government reopens. This time, however, the added threats of mass federal layoffs could leave a more lasting mark by making furloughed employees nervous to spend and thus delaying the eventual recovery.
Historically, shutdowns have had a limited impact on stock and bond markets as they are often short-lived, and essential services and companies continue to function. However, if the shutdown goes on for longer, it will leave investors and the Fed "flying blind" when it comes to being able to rely on critical data, including the jobs report, which is due on Friday, October 3.
Longer or repeated shutdowns can also reduce confidence and cause investors to flock away from stocks toward safe-haven assets like cash, short-term bonds, gold, as well as allocate away from the U.S. markets as a whole. We saw this during the longest shutdown in history, which lasted 35 days from December 2018 to January 2019, when the stock markets tumbled 13% and bonds rallied.
While government shutdowns create uncertainty, history shows that markets and the economy have generally bounced back once they end. Still, every situation is unique, and the length and scale of this shutdown could influence outcomes in new ways. If you have questions about how this may impact your financial plan or portfolio, please don’t hesitate to reach out to our team. We’re here to help you navigate with clarity and confidence.
James Artale is a financial advisor located at EmVision Capital Advisors, 251 W. Garfield Rd. Suite 155 Aurora, OH 44202. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (330) 954-3770 or at info@emvisioncapital.com.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Additional advisory services offered through EmVision Capital Advisors, LLC are separate and unrelated to Commonwealth. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network. Registration as an Investment Adviser does not imply any level of skill or training.