US Government Shutdowns: What's The Deal?

The potential for a government shutdown has been making headlines the past few months, but are they really that big of a deal? Admittedly, the term sounds dooming and it can, unfortunately, put additional hardships on many federal employees. Historically though, once previous shutdowns were resolved, there typically weren’t any significant, lasting effects on the economy or the government. 

What is a Government Shutdown?

At the federal level, a shutdown can happen when disagreement exists among Congress and/or the President regarding a budget for government programs, including Medicare and Medicaid, Social Security, as well as federal departments and agencies. In the event that Congress and the President fail to agree on a budget, it results in a shutdown until they can resolve the issues and pass funding.

It’s commonly cited that there have been 18 U.S. government shutdowns since 1976, however, many of these were not full shutdowns, but rather partial shutdowns or short-term funding gaps that were resolved over the weekend after missing the Friday budget deadline.  In reality, the government has been quite active during all of them.

What Happens During a Government Shutdown?

When a shutdown occurs, the government stops providing all but what it refers to as "essential" services. Services that continue during a shutdown include law enforcement, national security operations, the National Weather Service and its parent agencies, medical services at federal facilities, the postal service, armed forces, air traffic management, and corrections (the penal system).

National Parks and other federal tourist destinations like the National Zoo and the Smithsonian are typically closed.

The Social Security Administration still sends out benefit checks and it also still accepts new applications, although review of some of those applications was delayed during the last government shutdown.

In instances where IRS employees were furloughed, there have also been tax refund delays. According to the U.S. Office of Management and Budget, that resulted in about $4 billion in tax refunds being delayed during the last partial shutdown in October 2013.

How Have Markets Reacted in the Past?

“While the headlines can inspire a little fear, this isn’t a time to panic,” said JJ Kinahan, Chief Market Strategist at TD Ameritrade. “There have been government shutdowns and short-term funding gaps in the past and, overall, there has been a minimal impact on the stock market.” One thing to keep in mind is that there’s no way to know how markets will end up reacting. Sometimes stocks have gone up, sometimes they’ve gone down.

During the last partial government shutdown in October 2013, S&P 500 (SPX) was actually up by the end of it (see chart below). The consumer discretionary sector and defense stocks dropped a little further than the SPX halfway through it, but they were also positive by the time it ended.

The Bureau of Economic Analysis estimated that October 2013’s 16-day shutdown lowered real GDP by 0.3% in the fourth quarter that year. Consumer confidence also took a big hit in the month that shutdown occurred, although that didn’t seem to impact consumer spending too much as U.S. retail sales beat expectations during the same timeframe.

You can read more about how a potential government shutdown might affect different aspects of the market in today’s Market Update.   

S&P 500 DURING TWO SHUTDOWNS. The S&P 500 (SPX) performance during the shutdown in October of 1979 is charted on the left side, and chart on the right shows the SPX’s performance is charted during the last government shutdown in October 2013. Chart source: thinkorswim^® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Instead of panicking and potentially making emotional decisions, Kinahan suggests investors take some time to reassess their portfolio to make sure they’re comfortable with their level of risk, especially if they haven’t done so in a while. After 2017’s rally, your portfolio might have become overweight in certain sectors and no longer in line with your risk tolerance and investment objectives.

As always, don’t let headlines drive you to make emotional decisions. However, now may be a good time to review your portfolio to ensure you haven’t taken on more risk than you may be comfortable with.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.