Shutting it Down

By now you've likely heard about the shutdown that wasn't, or at least that wasn't a lengthy ordeal. When last Friday ended without a spending deal in Congress, everyone knew the government was going into partial shutdown mode. This would mean federal workers being furloughed, national parks closing, and even much of the IRS being shuttered for who knew how long. While this kind of thing should be a rare and surprising occurrence, personally I wasn't shocked so much as embarrassed. I try to not "get political" in these posts, but it's hard watching so many smart people in Washington D.C. acting so dumb.

As frustrating as this situation is, or was, it's interesting that the stock market doesn't really seem to care about government shutdowns.

The government shutting down sounds like such a bad thing so it's natural for people to wonder how it would impact the markets. Perhaps surprisingly, the market barely budged on news of the shutdown and even ended up yesterday as the political impasse ended.

As it turns out, the shutdown was short-lived, having been resolved yesterday with yet another continuing resolution to fund the government, this time for just a few weeks until February 8th. But how can the stock market seem so blasé about the government shutting down and this level of political dysfunction?

The main reason is that for all the news and bluster about government shutdowns, they don't tend to impact the economy all that much. This might be due to the typical shutdown being relatively short. While the mid-90's saw a shutdown lasting the better part of a month, the longest in history, most shutdowns have lasted a few days or less.

The last lengthy shutdown came during October 2013 and was one of the longest at 16 days. Approximately 800,000 federal workers were furloughed and maybe another 1.3 million were asked to work on a temporary basis without the promise of being paid.

The stock market is always looking ahead, however. While the 2013 shutdown created numerous problems at the household level for impacted workers, and consumers more broadly reported pessimism at the time, the economy and the stock market were stable. Consumer spending, which accounts for almost 70% of our economy, actually rose during the shutdown. And stocks were up about 2% during the period.

It's estimated that the 2013 shutdown cost the economy $24 billion, which is a healthy chunk of lost productivity. But with total GDP of almost $17 trillion that same year, you can get an idea why the markets tend not to care very much about politicians who can't seem to agree on how to budget.

The government shutting down has numerous political, social, even geopolitical implications. But investors, as they often do, saw through the political grandstanding and brinkmanship, assuming correctly that any shutdown would likely be short and then life would go on again (or at least for a few more weeks when we get to watch this play out all over again – hopefully with a more reasonable and sustainable outcome). That, coupled with pretty good market fundamentals, is why the market was so sanguine about the shutdown.

Have questions? Ask me. I can help.