As another government shutdown looms, markets remain steady

Milton Ezrati

Chief Economist

The government shutdown caused considerable concern and commotion seemingly everywhere.  Worry that it will return continues to do so.  Politicians decry it as a failure of government (but not them personally.)   Bureaucrats at high and low levels describe it as a threat to national security, law enforcement, and the nation’s general well-being.  Those at the IRS have threatened delays in refunds.  Some economists, though not all, predicted that the lack of budget authority in Washington would stall the economy.  The media has run stories non-stop on who was right, who was wrong, and what evils would befall the country if Washington fails to work out matters.  Now that the shutdown is on pause, the same concerns about another bout remain.  The only place where insouciance has is in financial markets.

Stocks and bonds came through the shutdown as if nothing was happening.  Of course, there were good days and bad, but government bonds held their value.  The yield on 10-year treasury bonds, for instance, stood at just under 2.8 percent just before the shutdown began on December 22 and hardly changed at all despite all the warnings of disaster.  These yields ended 2018 at just over 2.7 percent, hardly much change, and ended the shutdown at much the same levels.  The stock market, if anything, seemed even less bothered.  The broad-based S&P 500 Stock Index did fall on the first day of trading after the shutdown started, by about 2.7 percent in fact.  But stock prices then climbed.  By year end, 2018, this index was up 10.7 percent from its level just before the shutdown began and was about at that level when the present pause began.

In some ways, the market’s shrug seems strange.  After all, stocks, in particular, have a reputation for having a greater not a lesser sensitivity to economic and political news.  It would seem in this instance that the market for once took a longer-term, more fundamental view of things.  (It is highly unusual, to be sure, but it does happen from time to time.)

For one, most investors had confidence that the shutdown would not last.  They have seen quite a few of these over the years, and for all the wringing of hands each time on TV and the rest of the media, all of these historical precedents ended without much economic or financial incident.  And they were right.  No one wants this resolved more earnestly than does Washington.   Even as this one extended a bit longer than the others, investors retained this common sense of the matter.

Despite the commonplace anguish elsewhere in the country, investors were also well aware that the scale of disruption was less than people commonly believed.  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.  Since government workers earn more than the average American, the dollar effect was likely bigger than the headcount would suggest but still less than the news was suggesting.  Of course, government contractors also missed payments.  They and their workers probably loom larger than the government workers in this equation.  Still, larger are those who depend on government workers and contractors for their business, what economists refer to as the multiplier effects.  If their pain was less intense, their numbers and income surely outweigh those of the government workers and the contractors combined.  But even this entire picture, of which the investment community well knew, fell far short of the picture painted by the media, and investors knew that, too.

The investment community also knew there would be a catchup.  Even if the initial effect had a significant impact on sales, revenues, incomes, and profits, the end of the shutdown would give all the workers their back pay, all the contractors would see their invoices honored, other businesses and workers that depend on these two would also see their situation improve, and the economy would spring back from any immediate setback forced by the shutdown.

On a more fundamental level, investors were also well aware that no issue of economic or financial significance hung on the outcome.  On one side, Donald Trump wanted funding for his “wall.”  On the other, Nancy Pelosi wanted to thwart President Trump.  As much as the country desperately needs a revision of its immigration laws, that is not likely to occur, however, the shutdown matter gets resolved.  Even Trump’s offer to make concessions to the “Dreamers” was incomplete. However it ends, all are confident that no new policy of any significance will emerge.  In other words, nothing will alter the value calculations made before the shutdown started.

If the sides fail to reach a compromise and the shutdown returns, these same feelings will likely still prevail.  There is a chance that such an event because it would have no historical precedent in the memories of most investors, could foster the sense that this time things are different, but likelihoods 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 get the other to take the blame they both deserve.

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