The United States government began a partial shutdown this morning after last minute attempts by lawmakers failed to agree on a budget and President Obama's controversial health-care law. The shutdown is the first since 1996. Althouugh thousands of government workers will be furloughed, essential services such as the issuing of Social Security checks and the U.S. mail will continue. We've had questions arise as to how this may affect the financial markets.
There have been 17 shutdowns since the current budget process started in the mid-1970s. On average, the S&P 500 has come under modest downward pressure before, during and immediately after shutdowns, but rebounded by 10 days after the government got back to work (as shown below in our table provided by Ned Davis Research).
A bigger point of concern would be if Congress fails to raise the debt ceiling. The Treasury department estimates that emergency measures will not be exhausted until October 17th. During the debt ceiling battle in August of 2011, the S&P 500 dropped -16.8%.
Absent a default, the biggest impact of a shutdown could be on investor sentiment, which has recently pulled back from excessive levels of optimism. A successful resolution to the budget and debt ceiling debates combined with extreme pessimism would set the stage for a resumption of the market's uptrend.
Stacey Wall serves as President & CEO of Pinnacle Trust. You can reach Stacey by emailing him at email@example.com or by calling our office at 601-957-0323.