Market Comment: Capital Market Reactions to a US Government Shutdown

News item -

Last week, it happened again: a government shutdown paralyzed sections of the civil service in the US for three days and sent US officials on forced leave. Now, a short-term interim budget keeps the administration running until 8 February.

Nevertheless, without an agreement between Democrats and Republicans to raise the debt ceiling, a new budget freeze threatens. How do capital markets deal with exceptional times in Washington? Three questions to Reinhard Pfingsten, Member of the Global Investment Committee and CIO of Bethmann Bank. 

How unusual is the government deadlock in the US?

R. Pfingsten: Negotiations about an increase of the US-debt ceiling are a recurring part of politics in Washington. However, due to missing majorities and compromises, there have been 19 short-term shutdowns of the civil service since 1976. Of these, in 12 cases the shutdown were lifted in less than ten days. Especially Jimmy Carter and Ronald Reagan were affected as presidents. The longest shutdown took place at the turn of the year 1995/96 when under President Bill Clinton the financing of the federal budget was blocked for 21 days. Under Barack Obama, we experienced a spending freeze for 17 days, in October 2013.

Which economic impact do you expect from the shutdown?

R. Pfingsten: At the last government shutdown in October 2013, around 800,000 state employees were sent on unpaid leave. Museums and national parks remained partially closed. But the economic effects of such measures remain limited. In relation to the overall US budget, saving some salary payments does not significantly affect the US government's financial leeway. The public excitement about the unpopular measures mostly leads to a short-term solution of the government crisis and a limitation of economic effects. 

Which reactions can be expected on stock markets?

R. Pfingsten: The more unexpected a shutdown occurs and with increasing duration of the restrictions, the higher the nervousness of the capital markets. But all in all, market reactions in the past have remained limited for most part. Analyzing ten government crises in which state pay was blocked for more than three days, the US stock market corrected on average by less than 1% during that period. Furthermore, markets rebounded relatively quickly after the termination of a shutdown. In conclusion, the political showdown is much more seen in a media than in price reactions on stock markets.