Markets and the Shutdown

selective focus photography of closed signage

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With the government shutdown on pause, I received this interesting question last week:

“I’m a young investor, and I’ve never experienced anything like this shutdown before.  And there may be another in 3 weeks!  I see that the stock market seems not to care.  How can this be?  How should I, a thirty-something, think about it?

I can certainly understand this young person’s confusion and concern. During the shutdown and even still, everyone seems very worried about its impact.  Politicians have decried it and bureaucrats have described it as a threat to national security, to law enforcement, and to the nation’s general well being.  Some economists –– though not all –– have predicted that the economy would stall, but the February 1 job reports indicates they were wrong.  The media have run stories non-stop on who was right, who was wrong, and what evils would befall the country if it did not end soon.  But the stock market, as our young questioner points out, seemed little bothered.  The broad-based S&P 500 Stock Index did fall on the first day of trading after the shutdown started on December 22, by about 2.7 percent.  But on balance, it climbed after that.  By the end of 2018, it was up 10.7 percent from its level just before the shutdown began and held those gains right up to the time that the “pause” was announced.

The market’s shrug would seem to have at least four drivers:

  1. Most investors had confidence it would not last.  They have seen quite a few of these over the years, and for all the wringing of hands, the shutdowns all ended without much economic or financial incident.  And even as this one went on longer than the others, investors retained their common sense of the matter.
  2. The impact of the shutdown, its scale, didn’t threaten the economy as much as the media said it would. According to government estimates, some 450,000 workers were either furloughed or had to work without pay.  That is less than 0.3 percent of the country’s workforce.  The economy produced more jobs than that in the last three months of 2018.  Of course, government contractors also missed payments.  Those who depend on government workers and contractors for their business also suffered — victims of what economists call multiplier effects.  Perhaps the 800,000 workers referred to frequently in the media took all these effects into account.  That would have had an economic effect, if the shutdown had continued, but still not the disaster that common rhetoric implied.
  3. However severe or understated the problem was, investors knew that government workers would get their back pay (and contractors would have their invoices honored) when the shutdown ended. What is more, contracted work that was put on hold for the shutdown would resume. All would help the economy spring back.
  4. Investors understood that no issue of real economic or financial significance hung on the outcome. Donald Trump wanted funding for his “wall,” while Nancy Pelosi wanted to thwart Trump.  As much as the country really needs to revisit its immigration laws, that was not likely to occur, no matter how the shutdown was resolved.  Investors understood that no new significant policy would emerge.

If the sides fail to compromise and the shutdown returns, this same analysis will likely prevail again.  There is a possibility that another such event, because it would have no precedent in the memories of most investors, could make them feel that this time things would be different, but the odds do not favor such a reaction. What might change matters is if the dispute takes on more substance than a cynical battle between political heavyweights to see who can pin on the other the blame they both deserve.

And even if something more substantive develops, young people investing in stocks for the long term should have every reason to look beyond this episode and continue their bet on the U.S. economy’s basic growth and its tendency to lift stock prices over time, no matter the fear or distraction of the moment.