BY SUZANNE HAZLETT, MBA, CIMA®, CFP®
The United States federal government shut down after lawmakers could not agree on funding allocations ahead of the October 1 start to the government’s fiscal year. Shutdowns typically do not make sizeable impacts on the markets or the economy. However, the potential for a lengthy political impasse bears monitoring.
Regardless of near-term choppiness, the S&P 500’s 12-month gains following the 20 shutdowns over the past 50 years have averaged 13%, with positive performance 85% of the time. Ultimately, fundamentals such as gross domestic product and earnings growth drive the market in the long term. A temporary pullback could present a potential opportunity for patient investors to acquire high-quality companies at more attractive valuations.
The shutdown will continue until Congress votes to fund the government. Republicans control both houses of Congress, but by thin majorities, indicating some level of bipartisan support is necessary to approve a funding bill and reopen the government. In the Senate, Republicans hold 53 seats, but 60 votes are required to pass a resolution.
Essential government workers are expected to continue working during a shutdown, keeping the lights on in areas related to public safety. Social Security and Medicare benefits and federal pension payments will continue during the shutdown. Typically, nonessential workers are furloughed and recalled after funding is approved. Historically, all furloughed workers have been paid retroactively.
Companies heavily reliant on federal contracts could face temporary revenue disruptions. Businesses that require ongoing interaction with federal agencies for permitting or research and development are also likely to face disruptions. The processing of loan applications by the Small Business Administration could be delayed.
Consumer-facing businesses could experience a different impact as furloughed federal employees or those working without pay will likely cut back on discretionary spending. This poses a particular challenge for retailers and restaurants in regions with high concentrations of federal workers, most notably Washington, D.C.
Economic data reporting is also likely to be affected. The unemployment rate will increase if hundreds of thousands of federal workers are laid off, even temporarily. Additionally, government reports will be delayed, which could impact the U.S. Federal Reserve’s ability to make informed monetary policy decisions at its next Federal Open Markets Committee meeting in late October.
Suzanne Hazlett, MBA, CIMA®, CFP®, is a Certified Investment Management Analyst® and CERTIFIED FINANCIAL PLANNERTM professional. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Securities are offered through Raymond James Financial Services, Inc., member FINRA/SIPC.. HAZLETT WEALTH MANAGEMENT, LLC is independent of Raymond James and is not a registered broker/dealer. 675 Sun Valley Road, Suite J1 + J2, Ketchum, Idaho, 83340 208.726.0605 HazlettWealthManagement.com
