The Impact of the U.S. Government Shutdown On the Markets

Stocks markets worldwide declined Monday as the U.S. government faced a shutdown due to the Congressional budget stalemate. Today, markets rose, even though the shutdown occurred.  Here are some considerations for investors:

  1. As long as this is a short-term event, it should have little economic or market impact. Political events drive markets only in the short-term; the economy and corporate profits rule in the long term.
  2. If this lasts two weeks or longer, it could have some economic impact and cut into corporate profits in the fourth quarter. That may be why the markets fell during the last week of September.
  3. The last time the government shutdown in 1996, the Standard & Poor’s 500 Index declined by 3.7 percent during the shutdown, and then went up by 10.6 percent in the month following the government’s reopening.
  4. More important to investors is the possibility of a technical government default on its debt if Congress does not raise the debt ceiling later this month. That could hurt stock markets, just as it did in the summer of 2011 when the government’s debt was downgraded. We will have to wait to see how that plays out.