The political deadlock in Washington has become a key target some 230 miles from Wall Street, as another potential federal government shutdown looms and lawmakers battle to raise the debt ceiling.
As tensions mount ahead of fiscal year-end, President Joe Biden on Thursday suspended a trip to Chicago to meet with Congressional Democrats to find a way to maintain government funding and avoid a default dangerous payment of the United States by raising the debt ceiling.
Senate Democrats were also preparing a bill to prevent a government shutdown that aims to fund the United States until early December.
Read: What happens if the United States defaults on its debt?
Budget struggles leading to time off for thousands of federal workers have not been uncommon in recent decades. Funding deficits have forced 20 full or partial government shutdowns that have lasted for more than a day since 1976, according to Dow Jones Market Data, most of them occurring under Republican presidents (see chart).
But do political wrangling over the US budget matter on Wall Street?
Overall, the reaction on Wall Street before each previous shutdown has been modest when you consider the performance of the S&P 500 SPX Index,
The S&P 500 is set to record a 2.2% decline this week through Wednesday, according to FactSet. This could be an outlier if the current losses continue and the government closes again, with each shutdown over the past 45 years showing the S&P 500 Index registering positive gains 55% of the time in the week leading up to each. cut.
However, the S&P 500 was down about 7% a week before the Trump administration’s second shutdown – the most recent and longest since the mid-1970s – before stocks rebounded (see chart below).
Longer stops, bigger payouts?
Digging deeper, once the closings are made, historical data shows that the government’s extended shutdowns overlapped with larger gains for inventories.
This chart shows that stocks have risen 0.1% on average over the last 10 federal shutdowns lasting five days or more. But stocks climbed nearly 2.9% on average when the closings lasted 15 days or more.
This time around, lawmakers must strike a deal to avoid another government shutdown and raise the debt ceiling.
Yet both can end up being “an arbitrary high-level / low-impact tax nuisance,” according to Keith Lerner, co-chief investment officer at Truist Advisory Services, and US macro-strategist Michael Skordeles.
âWhile the uncertainty surrounding these events tends to increase investor angst and worsen
Short-term market volatility, historical evidence suggests minimal impact on market direction, âthe team wrote in a note on Wednesday.