1/23/18 - We are reposting this Insight in light of the government shutdown that was triggered over the weekend but was quickly resolved on Monday. Although the specific details of the current circumstance have changed a bit since last August, the scenario is effectively the same one. Congress and the President have agreed to a continuing resolution that will temporarily fund the government through February 8th, with Congressional opponents agreeing that they will attempt to work through differences on immigration reform and the fate of DACA recipients between now and then.
A key takeaway for us is that the threat of government shutdown is basically treated as a non-issue by financial markets these days. As James Robinson of the USA Today Board of Contributors was quoted as saying, "Government shutdowns are high drama but essentially low impact."
“...if we have to close down our government, we’re building that wall.” – President Donald Trump
Next Tuesday our congressional leaders will return from their August break and begin what is sure to be an exciting fall session. Among many other things, they face the start of a new fiscal year on October 1st, meaning one of the top priorities in coming weeks will be budget negotiations. The Federal government has funding approval only through September 30th, and in order to “keep the doors open” the two chambers and the President must work together to pass the needed appropriations bills or a stopgap continuing resolution. While this task is difficult enough for a divided Congress, all eyes are currently focused on what could potentially culminate in a standoff between the Capitol and the White House.
One of the most controversial planks in President Trump’s campaign platform was his promise to build a wall along roughly 1,000 miles of US-Mexico border. Trump is anxious to begin making good on that promise, and has insisted that in order for him to sign a FY2018 spending plan it must include funds dedicated to beginning construction on the wall. This poses a problem. Democrats seem unanimously opposed to the idea of funding the wall, and there may be enough resistance within the Republican Party to make the wall a “no go” in getting any appropriations bills through both chambers of Congress and sent off the White House.
Both the President and Congress may find themselves up against a wall come decision time in late September. Either make concessions and strike some sort of compromise, or risk a government shutdown on October 1st. Trump doesn’t seemed phased by the prospect. In last week’s speech delivered at a rally in Phoenix the President indicated that a government shutdown was a card he’d be willing to play in negotiating for the needed funding. While it might be tempting to write this off as simple posturing, it’s important to note that this is not an isolated statement. On numerous occasions Trump has expressed some level of willingness/comfort with the idea of a shutdown. In a May 2017 tweet, for instance, he said, “Our country needs a good shutdown in September to fix this mess!”
Congressional leaders clearly want to avoid a game of brinksmanship with the President, and many of them have attempted to downplay the risk of a shutdown in their public comments over the past week. Even so, the amount of uncertainty and tension resulting from Trump’s remarks is palpable. For context, it’s important to remember that if the government did shut down it would not be the first time. The current situation, in fact, is not that unlike what we experienced in 2011 and again in 2013 when the government actually did shut down for over two weeks over an Obamacare-related standoff. This was one of eighteen times a shutdown has occurred since the mid-70’s.
Additionally, the term “shutdown” in and of itself is exaggerative. In reality the vast majority of government keeps functioning as normal. Entitlement programs, military personnel, border patrol, post office services – and yes, the politicians themselves – continue to receive funding and for all intents and purposes operate business as usual. What’s more, asset prices historically have not given much credence to a government shutdown as posing a real threat to the economy or financial markets. The table below, updated from the first time we posted it in 2013, shows the performance of the S&P 500 leading up to, during and following each of the past eighteen shutdowns. As you can see these events have tended to come and go without much fanfare in financial markets.
Congress has an incredibly full plate over the next several weeks as they hit the ground running into the Fall session. Tax reform, healthcare, and many other priorities will be staring them in the face, with budget negotiations threatening to back the various sides up against a wall before any resolution is reached. Beyond all these expected items, a new priority will clearly be disaster relief for the victims of Hurricane Harvey. It remains to be see what (if any) impact the hurricane will have on Trump’s focus on funding the wall in FY2018, but perhaps this crisis will play the role of temporarily diffusing that tension and kicking the wall debate down the road a bit. Regardless of how it plays out, the historical record seems to suggest that while we should certainly proceed with caution, the prospect of a temporary government shutdown is no reason for panic.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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