🛑 Shutting it down

Hey hey, happy Monday! 

The best marketwatchers in this era were the ones who paid attention in middle school social studies.

This has been a particularly policy-driven year, for better or worse. We’ve had to endure arguments around tariffs, spending bills, interest rates and a potential Middle East war.

Today, we need to talk about the dynamics of an event I’m pretty sure we covered in seventh grade without realizing how stupidly relevant it would be two decades later. Here’s a 5-minute read on how much government shutdowns have mattered to markets and the economy.

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FTSE Russell Survey: Investors Upbeat on Portfolios, Downbeat on Economy

It’s 2 pm ET on Friday, September 26.

Right now, Congress is in gridlock over how to fund the federal government beyond September 30. We’re four days away from a government shutdown, or when the nonessential branches close because the government loses the authority to spend money (Congress has the power of the purse and must establish the budget, yada yada…I promise I did the homework!).

Political squabbles can be fast-moving and unpredictable. If Congress reaches consensus by Monday morning, I will send this out and immediately scream into a pillow. Mostly out of joy, but out of frustration because it is so hard to say intelligent things in these wild days.

If a shutdown is averted, you can save this for the next time politicians get into a budget fight (probably soon!).

If there’s no resolution, though, you’ll get this about 40 hours before the deadline.

Here’s all you need to know about government shutdowns – why they throw people off kilter, and what they mean for your money and investments.

Shutdowns are rare (and typically short-lived).

Government shutdowns are one of those cry wolf events that almost happen plenty of times, but rarely actually happen.

It feels like Congress gets into nastier budget fights every year. These fights often look different – some are over the budget itself, while others center around the amount of debt the U.S. can take on to fund this budget.

However, for all the noise we have to endure over fiscal squabbles, Congress tends to get its act together in the final hours.

Not always, though. Since 1981 – the year funding gaps legally required closure of certain branches of government – the federal government has shut down 10 times for an average of nine days.

The last time the federal government shuttered was in late 2018 – almost seven years ago (a fact that shocked me because I remember those days like they were yesterday).

In this context, a shutdown means that federal parks and monuments close, government-funded research stops, and certain government benefits and processes cease until a funding agreement is reached. Employees of non-essential government functions are furloughed – or sent home without pay. The critical federal operations continue – law enforcement, TSA, the postal service, among others – but those employees may have to work without pay.

A shutdown is a big deal, and people feel it in a lot of unexpected ways. Often, the political pressure is too intense for these budget standoffs to last for too long. 

Then again, three of the four latest shutdowns have lasted for more than two weeks. Maybe because we collectively have greater tolerance for political drama (thanks, Internet overlords!).

Shutdowns still shock us.

Shutdowns are rare – and impactful – enough to rattle our psyches every time they happen. 

Five out of the 10 shutdowns since 1981 have led to sharp drops in consumer confidence. In the 2018 shutdown, consumer confidence slid the most in seven years (although there was a stock market drop and a litany of concerns over interest rates at the time, too). In 2013, that same confidence gauge slid the most in nine months.

I’ve talked in the past about how important it is to think of confidence in present and future terms. Or, what you feel now about your finances versus what you think could happen down the road. Many of the confidence crises we’ve seen around shutdowns have been about what could happen (versus what is happening). Vibecessions that cleared up quickly after the government reopened.

Hits to confidence can matter, though. Showing up to the Smithsonian with your rocket-obsessed kid only to get stopped by a “closed” sign at the entrance can impact how you spend your money (and really ruin your day). They can also leave you feeling some sort of way about political instability.

Government workers temporarily lose their jobs, too. They may get back pay, but only after the shutdown ends. In the last shutdown, nearly 340,000 government workers were furloughed, according to PBS estimates. If people aren’t making money, they aren’t spending money. Our wallets drive 

Another consequence that matters more to Wall Street nerds than most Smithsonian visitors is that a lot of economic data can’t be released during shutdowns. The Bureau of Labor Statistics – a vitally important source of economic data that’s under a lot of scrutiny right now – has closed as a part of past shutdowns, and jobs and inflation reports have been delayed.

This is a big deal for our interest-rate superheroes (the Federal Reserve), who preach about how they like to make decisions based on economic data. You, me and Fed chair Jay Powell are all flying blind without these crucial reports.

Could a shutdown matter for my investments?

Shutdowns alone haven’t done enough to topple a thriving economy. They’ve never led to a recession or market crash, even if some have happened during recessions or market crashes. Usually, shutdowns have led to some initial shakiness in the stock market, even if the losses are only temporary.

However, we’re working with a sample size of 10, and there are only a handful of shutdowns that have lasted longer than a few days.

I have no idea what happens in this particular situation. I won’t pretend to know the inner workings of Congress and its factions. Nobody can predict the future, and few can give you truly educated guesses in this situation.

What I do know, though, is that the stock market is especially vulnerable to shocks right now.

How do I know? Well, for most of this year, spending and hiring have slowed down, yet stock prices have persistently moved higher (minus April’s crash). Hopes and dreams have sprinted ahead of actual profits in the tech space thanks to AI. High valuations are OK until investors aren’t willing to dream anymore.

On top of that, the bond market hasn’t been as reactive to stock market selloffs as it has in the past. When prices drop from political tensions or inflation worries, long-term bonds haven’t stepped in as the portfolio cushion people expect.

A shutdown would be another shock to absorb, and it’s tough to say how well investors will absorb it. I’d feel better about the shock absorption part if the economy were in a better spot, and this catalyst were a little more defined. 

Shutdowns alone aren’t a reason to sell all your stocks and run for the hills. Frankly, I can’t think of many (any?) events that should make you feel that way. Except for a zombie invasion, and you know what, you have bigger problems on your hands there.

If you’re investing for years and decades, you have time on your side to take some risks. I just wouldn’t be cavalier about buying that hot stock that could get hit harder in a selloff and may not have the fundamental underpinning to survive.

Today’s stock market was built on adversity. Punches that keep coming, but don’t knock us out because we’re jaded and braced for the worst.

Be prepared for the worst, but don’t be surprised if the optimists prevail once again.

Thanks for reading!

Callie

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