Political gridlock in Washington has become a key focus some 230 miles away on Wall Street, as another potential federal government shutdown looms and lawmakers fight over raising the debt ceiling.
As tensions climb ahead of Thursday’s end of the fiscal year, President Joe Biden shelved a trip to Chicago to huddle with congressional Democrats to find a way to keep the government funded and to avoid a dangerous U.S. default by raising the debt ceiling.
Senate Democrats also were teeing up a bill to prevent a government closure that aims to fund the U.S. through early December.
Budget fights leading to furloughs for thousands of federal workers haven’t been uncommon in past decades. Funding gaps have forced 20 full or partial government shutdowns that lasted more than one day since 1976, according to Dow Jones Market Data, with most occurring under Republican presidents (see chart).
But does political wrangling over the U.S. budget matter on Wall Street?
Overall, the reaction on Wall Street ahead of each earlier shutdown has been modest when looking at performance of the S&P 500 index SPX, +0.16%.
The S&P 500 is on pace for a 2.2% decline this week through Wednesday, according to FactSet. That could be an outlier if current losses hold and the government shuts down again, with each shutdown over the past 45 years showing the S&P 500 index booking positive gains 55% of the time in the week before each hit.
However, the S&P 500 booked a roughly 7% decline a week before the second shutdown of the Trump administration — the most recent and longest since the mid-’70s — before stocks bounced back (see below chart).
Longer shutdowns, bigger gains?
Digging deeper, once shutdowns do occur, historical data shows that extended government closures overlapped with bigger gains for stocks.
This chart shows stocks edged 0.1% higher on average during the past 10 federal shutdowns lasting five days or longer. But stocks climbed almost 2.9% on average when closures lasted for 15 or more days.
This time around, lawmakers need to strike a deal to avoid a new government shutdown and raise the debt ceiling.
Still, both may end up being “arbitrary high profile/low impact fiscal nuisance,” according to Keith Lerner, co-chief investment officer at Truist Advisory Services, and U.S. macro strategist Michael Skordeles.
“While uncertainty around these events tends to heighten investor angst and add to
short-term market volatility, the historical evidence suggests a minimal impact on the direction of the market,” the team wrote in a Wednesday note.