Funding covering roughly a quarter of the budget for the U.S. federal government expired on October 1st, causing a partial shutdown. This is a storyline we’ve seen before, as partisan divisions once again drove a standoff over a budget agreement. Republicans are pursuing a narrower spending bill, while Democrats are seeking an extension of healthcare subsidies and a reversal of recent cuts to healthcare programs. Negotiations are reportedly ongoing, but it’s difficult to gauge what a final resolution will look like or when one will arrive.
Importantly, not all federal services “shut down”. Essential operations, including Treasury payments and mandatory spending programs like Social Security, continue uninterrupted.
Economic and market implications
U.S. government shutdowns vary in length, historical episodes show that U.S. stocks tend to weaken just before, during, and shortly after it ends. Because most shutdowns do not last very long, the equity market impact is typically short-lived, with stocks usually regaining lost ground soon thereafter.
For the economy this shutdown comes at a more delicate time. The U.S. labour market has recently shown signs of softness, and President Trump’s proposed plans to dismiss federal workers during the shutdown add another layer of uncertainty. Moreover, the suspension of key economic reports, such as the monthly employment report, makes it harder for both policymakers and investors to assess economic conditions. Notably, the delay of major economic data makes the job of the U.S. central bank more challenging in the near-term as policymakers evaluate whether further interest rate cuts are warranted to support the economy.
U.S. government shutdowns are not unusual. There have been 20 such episodes since 1976, according to RBC Economics, with most of them resolved in under ten days. While they can create short-term downside volatility, they have generally not been meaningful drivers for financial markets or the economy. We are closely watching labour market conditions, but in our view, U.S. government shutdowns are not a reason to change portfolio strategy.
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