The leader of the House has changed, but the likely outcome remains the same. After a short honeymoon following Rep. Mike Johnson’s ascension to speaker of the House, Republicans and Democrats appear to be stumbling toward a partial government shutdown this month. However, despite the uncertainty, there is no reason to panic about the stock market.
If Congress fails to pass spending bills by Jan. 19, several federal agencies, including the departments of Energy, Housing and Urban Development, and Veterans Affairs, will partially shut down. If the stalemate continues until Feb. 2 (also known as Groundhog Day), the rest of the government will close as well. Unfortunately, with the House and Senate not resuming until next week, time is running out.
In previous episodes, when facing similar circumstances, the House and Senate opted for short-term “continuing resolutions” to keep government funding at existing levels. Although this outcome is still feasible, Johnson prefers a different approach. He is against a short-term bill and instead supports one that funds the government for the entire fiscal year.
Johnson faces a challenging mission, as Republicans themselves are divided on how to proceed. Stephen Myrow, managing partner at Beacon Policy Advisors, explains that defense hawks in the party are cautious about potential military cuts, while fiscal hawks are more concerned about deficits. Johnson himself represents a district that includes Barksdale Air Force Base and Fort Johnson.
Myrow expresses skepticism about Johnson’s ability to deliver a top-line deal without causing dissent among certain party members. “While there might be positive rhetoric, I question Johnson’s ability to avoid a complete revolt,” says Myrow.
If a governmentwide shutdown occurs, hundreds of thousands of federal workers will face furloughs, while others in essential functions will continue working without pay.
Remember, as an investor, it is crucial to remain level-headed and not be swayed solely by political uncertainties.
The Potential for a Government Shutdown Looms
As the deadline for a potential government shutdown draws near, agencies such as the Securities and Exchange Commission (SEC) are preparing for the worst-case scenario. Their contingency plans involve operating with minimal staff, focusing primarily on essential tasks such as market monitoring.
Lawmakers who advocate for significant budget cuts would have more leverage if they postpone reaching a permanent agreement until spring. A law passed last year that suspended the debt limit includes a provision for a 1% across-the-board spending reduction if the government continues to operate under a continuing resolution after April 30, 2024.
Analysts, like Fundstrat Washington Policy Analyst Thomas Block, predict that the likelihood of a partial government shutdown within the next few weeks is above 50%.
However, it is important for investors to avoid succumbing to panic. While shutdowns can have a limited and temporary macroeconomic impact, historical data suggests that the effects are typically mitigated in subsequent quarters. According to the Congressional Budget Office, the real GDP decrease caused by the January 2019 partial government shutdown was offset in later quarters.
One concern during a shutdown is the potential disruption of economic data collection, including vital reports like the monthly jobs report. This lack of information could present challenges for the Federal Reserve in its efforts to navigate the economy towards a smooth landing. Additionally, shutdowns have been known to impact consumer sentiment and spending negatively.
Nevertheless, it would be unwise for investors to abandon the stock market in response to a shutdown. A study by RBC Capital Markets indicates that although stocks have historically experienced a 10% drop from their three-month high prior to a government closure, they have subsequently rebounded by an average of 18% over the following year.
While a government shutdown may present certain inconveniences, it is crucial not to let fear dictate investment decisions.