The looming federal government shutdown is likely to have a limited immediate impact on financial markets, though the stalemate in Congress over budget negotiations risks pushing the US economy into a long-anticipated recession.
The S&P 500 has climbed about 13.4% so far this year, largely due to big gains in tech stocks, while government bond yields have surged to some of their highest levels since 2007.
With the government poised to shut down Oct. 1 if Congress is unable to pass a federal spending bill, analysts believe that the impacts might be relatively significant but will not be felt immediately. Heightened credit risk, eroding consumer confidence, and a lack of data that typically serves as the basis for monetary policy decisions threaten to stymie economic growth if the shutdown occurs.
"The shutdown itself may be more of a distraction than an obstacle for the stock market," said Callie Cox, a US investment analyst at eToro. "The big risk is if the negative consequences from the shutdown are what ultimately tip the economy into a recession or investors into a panic."
'Minor selloffs'
When the government shut down for a record 34 days beginning Dec. 21, 2018, stocks stumbled initially but mostly rallied during that time. The S&P 500 rose nearly 10.3% during the shutdown.
Previous shutdowns have caused "minor selloffs" but have not triggered a bear market or larger economic crisis, Cox said.
Government bond yields have rallied on expectations that the Federal Reserve will be maintaining relatively high interest rates through much of 2024. Yields could climb further during the possible shutdown as investors seek the relative safety of government bonds.
The potential shutdown is unlikely to impact the current market rally, said Steve Deppe, chief investment officer at Nerad + Deppe Wealth Management.
"We've all seen this movie before; we all know how it ends," Deppe said. "The plot might be different this time, there may be a few more twists and turns, and there are certainly different actors, but I don't believe the potential shutdown is all that significant."
A shutdown will likely have a temporary, negative impact on GDP but would not impact markets, said Michael Crook, deputy chief investment officer at Mill Creek Capital Advisors.
"It's well telegraphed at this point, and economic growth is running a bit hot anyway," Crook said. "If the shutdown extends more than two to three weeks, we could see some deterioration in confidence, but longer-term interest rates are the main driver of markets right now."
Growing risks
Still, another government shutdown will likely highlight growing political dysfunction in the US, potentially posing further credit risk.
"The risk of another shutdown reflects a growing problem of governance for a country that appears to be getting more and more polarized," Win Thin, global head of currency strategy at Brown Brothers Harriman, wrote in a Sept. 26 note.
On Sept. 25, Moody's Investors Service warned that a shutdown would be negative for the United States' credit rating. Moody's is the only major credit rating agency to assign the US a AAA rating. Fitch Ratings lowered its rating to AA+ in August amid contentious negotiations over the government debt ceiling. S&P Global Ratings downgraded the US following a debt ceiling standoff in 2011.
The potential government shutdown, combined with the ongoing United Auto Workers strike, could create a perceived drag on economic activity and lower consumer confidence, according to Michael O'Rourke, chief market strategist at JonesTrading.
Consumer confidence fell in August and September as the number of consumers saying a recession is "somewhat" or "very likely" increased this month, The Conference Board reported Sept. 26.
Lack of data
If the shutdown drags on, it could interrupt the release of inflation and jobs data that the Federal Reserve would be using to decide whether it will hike rates again at its next meeting, which concludes Nov. 1.
The September jobs report is scheduled for release Oct. 6, and the consumer price index report, the market's preferred inflation measure, is scheduled for Oct. 12.
"Not having economic data would be a major issue," O'Rourke said. "Nonetheless, since the Fed believes it is at or near the end of its rate hikes, it will simply remain on hold until clear data emerges in one direction or the other."
During a Sept. 20 press conference, Fed Chairman Jerome Powell said that if the central bank did not get the data, it was unclear how it would affect policy in the case of a shutdown.
"We would just have to deal with that," Powell said. "It's hard for me to say in advance how that would affect [the next meeting]. It would depend on all kinds of factors that I don't know about now."