The latest political mess US politicians have gotten themselves, their country, and the rest of the world into is the “shutdown’ of essential US government services. This is only weeks away from when the Federal Reserve will run out of money from reaching congressionally sanctioned borrowing limits. Yes, a shutdown has happened before and in all but one case, markets were higher one year later.
A government shutdown in 1987 did precede a temporary market decline – which could be argued was due to other reasons. This current mess is a result of republicans and democrats not agreeing on government spending. One significant issue is House Republicans attempted to pass government funding bills that modified Obama’s Patient Protection and Affordable Care Act. Democrats rejected these changes and the stalemate resulted.
Complicating the stalemate is another “fiscal cliff” which is expected to occur around Oct 17th. At this point the US government will run out of the ability to borrow more money unless Congress raises the debt limit.
A worst case scenario is Congress does not raise the debt limit and the US defaults on some of it’s payments. This would lower confidence in the US dollar and potentially cause some changes to US credit worthiness – which has been the global “gold standard” for decades.
Most analysts believe US politicians will not let the situation go that far and will vote to increase the debt limit.
The good news is the economy is getting incrementally better in the US. The housing market is strengthening, employment markets have continued to improve, consumer credit has eased, and tax revenues have picked up.
The US fiscal position has improved significantly. In mid 2009, in the middle of the last financial crisis, the US deficit was close to 10% of their GDP. The Congressional Budget office is forecasting it will be closer to 4% by the end of the year – all due to a strengthening economy. If you consider the fiscal drag due to high debt levels and political disagreement – and the economy still continues to expand – it’s remarkable.
Short term markets are expected to be volatile and we likely will pause for a time given the market performance over the last 3-5 years. Mid-term, equities have all the potential for continued growth.
Below is a summary of the previous US Government shutdowns and the impact on the S&P500 equity market.
US Government Shutdown Impact: (Click chart to enlarge)