The Independent Market Observer

Waiting for the Government Shutdown (Again)

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jan 19, 2018 11:56:47 AM

and tagged Politics and the Economy

Leave a comment

government shutdownAs I have been saying, things are pretty good, economically speaking, as we move into the new year. But there is one significant risk that we need to watch. I’m speaking of the pending deadline (midnight today) when funding for the government runs out. At that time, the U.S. debt ceiling extension ends, the government cannot borrow any more money, and—if Congress (including both Republicans and Democrats) can’t come to some sort of an agreement—the government shuts down.

This has been pending for a while, of course. We last talked about the risks in Washington, in fact, just after Thanksgiving. I have been keeping an eye on the most recent round, but it seemed like a deal would be cut and the problem averted. Now, however, the situation is worse.

A difficult path

A deal is certainly still possible, and the House has actually passed an extension. But the path in the Senate looks to be more difficult. Democrats recently pulled out of a potential deal with the Republicans after controversial comments by President Trump. Even worse, the political gap within the Republican Party remains wide, with a considerable proportion of the caucus angry over the last debt ceiling extension.

But even worse than that? With a significant part of the tax reform debate centered around increasing the deficit, which will require multiple votes to increase the debt ceiling, the timing is not great. A government shutdown, therefore, is a real possibility.

Many in Washington are arguing that a government shutdown is not important. After all, it has happened before, with no real damage apparent at this point. President Trump has actually called for a “good shutdown.” Plus, many in both parties of Congress see it as the lesser of two evils when compared with a subpar deal. So, are they right?

Is a shutdown really “no big deal”?

No. The economic damage, while not crippling, would be real. Government spending would certainly decline, and spending from government employees who don’t get paid would decline as well. I’d say a reasonable estimate of direct economic damage would be around 0.25 percent of GDP per week for as long as the shutdown persists. It’s not the end of the world, but it certainly isn’t nothing either. It’s also probably not enough economic damage to force Congress into an agreement any time soon, which means that drag could go on for a while.

No. A shutdown could hurt confidence. The markets have risen on rising confidence (consumer and business) and economic growth. A shutdown could damage both, with short- and long-term effects. With interest rates set to rise, a government shutdown on top of that could be another hit to investor confidence, and it could conceivably be what pushes us into a correction. It’s not a certainty, but it’s something to watch out for—particularly as markets have been so calm recently.

Plan ahead for volatility

I don’t want to overstate the risks here. As I have noted, the real economic risks are not severe. The likelihood is that Congress will come to a last-minute deal, as it has done before. But I do think that piling this kind of political uncertainty on top of the existing economic and financial risks around the world is bound to have a negative effect on markets. Investors should expect more volatility and plan ahead for it. Once again, the news is all about Washington—and it could turn out to be unsettling.

Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®