Dear Readers,
Currently, I am focusing my attention on the behavior of the American government. The mills in preparation for the presidential elections in the fall of next year are beginning to pick up speed. An important topic currently is the approval of the next budget and the Government Shutdown if no agreement is reached. The reasons are typically disagreements about budget allocations between the President, the House of Representatives, and the Senate. While temporary solutions such as continuing resolutions can extend funding, persistent disagreements lead to a shutdown.
As a result, funds are lacking to continue public operations and non-essential services are suspended. Affected are the administration, educational institutions, the military, the healthcare system, and infrastructure. Salaries for government employees are not paid and investments are halted.
The most important and longest shutdowns were
- the 21-day shutdown 1995–1996: Due to resistance to major spending cuts.
- the 16-day shutdown 2013: Caused by a dispute over the Affordable Care Act.
- the 35-day shutdown 2018–2019: The longest, caused by a dispute over funding for the US-Mexico border.
The impacts are enormous: during the 2013 shutdown, salary payments to 1.3 million employees were delayed. 800,000 employees stayed home and many government facilities remained closed. The USA's gross domestic product fell by an estimated 0.1 to 0.2% due to these circumstances. The record for the longest shutdown is held by the Trump administration with 35 days in the winter of 2018/19.
What are the effects on the stock market? One might think that when a shutdown occurs, it is negative for (American) stock markets and prices fall. As so often, however, the connection is not that intuitive and simple. Since 1990, news of a shutdown always marks a low point for stock market prices, which subsequently rise. In fact, there are plenty of charts with longer-term studies circulating that attest to shutdowns having no effect on the stock market. However, these studies miss the crucial point.
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The beginning of the last shutdown marked a major turning point in the markets. During the historically long shutdown, markets rose, because they had already fallen beforehand.
Usually, the weeks before the shutdown are weak phases in the markets. In 1990 and 2018, the S&P 500 fell by nearly 20% beforehand, and the news of the shutdown marked the low relatively precisely. As so often, the market is therefore very clever and farsighted and can anticipate the signs that lead to the problems and unresolved disputes well and price them in beforehand.
Over the weekend, the budget issue flared up again under the leadership of the right-wing conservative wing of the Republicans. A core issue is the support provided in the Ukraine war. With the aforementioned means of a continuing resolution, government activities could be temporarily financed for another 45 days. The deadline is November 17th.
Historically speaking, the roadmap is thus clear. If there is no agreement regarding budget planning and the market expects that the following shutdown will cause significant damage to the economy and will not weather it well, then a window of 6 weeks follows in which the markets will fall, possibly even drastically.
In the third week of November, we would then see a bottom and transition into a solid year-end rally.
A nice stock market wisdom to conclude: „The market does not repeat itself, but it does rhyme“. Exact repetitions are rare, but similarities and patterns are omnipresent. Stay vigilant!
