Will a shutdown sink stocks?

With Washington gridlocked over the budget and with a shutdown looming Friday, here's a look at the likely impact on stocks and the economy.

By Anthony Mirhaydari Apr 7, 2011 1:04PM

The politicos seem hellbent on repeating the 1995 experience and shutting down the federal government starting Friday. A series of frantic powwows at the White House between President Barack Obama and congressional leaders have failed to secure a deal. And with the budget debate shifting from fiscal 2011 to the 2012 budget -- where the discussion has shifted from billions to trillions in spending cuts -- the two parties are headed straight for a brutal, drawn-out fight.

 

With the economy and corporate profits looking increasingly fragile as inflationary pressures build and consumer confidence plummeting, now is just not a good time to furlough nonessential government workers and shutter national parks.

 

The good news is that history shows a government shutdown doesn't really have an impact on the stock market. The bad news is that it could have a meaningful effect on Q2 GDP growth (Q1 growth is already looking pretty weak). And, of course, the acrimony sets the stage for an epic fight over the Treasury's $14.3 trillion debt ceiling, which will be reached "no later than May 16" unless Congress acts to extend it. Here's what to expect.

 

First, let's talk stocks. Jason Goepfert at SentimenTrader earns a living data-mining market history to see what the past can tell us about how stocks react to certain events. Goepfert went back and looked at the 17 shutdowns that have happened since 1976. Most lasted only a few days, and only one lasted longer than a week.

 

During the shutdowns, stocks showed a slight negative edge that peaked a week after the shutdown: The S&P 500 fell 65% of the time for a median loss of 0.2%. By a month later, stocks were back to normal and performance was more or less random.

 

The problem is that, unlike during the shutdowns of the mid-1980s or the mid-1990s, the economy is on a fragile footing, as I discussed in this blog post. Already, analysts are looking for Q1 growth to slow to just 1.5% -- down from 3.1% in Q4 2010 and below the rate that's needed to create jobs and pull down the unemployment rate.

 

Paul Ashworth, the chief U.S. economist at Capital Economics, notes that depending on how long a shutdown lasts, it can knock 1% or more off annualized GDP growth. With growth slowing, it wouldn't take much to get a quarter of economic contraction -- not unlike what the British are experiencing after enacting tough budget austerity measures.

 

 

For now, bond investors seem more worried about the risks of the budget fight jeopardizing the debt ceiling debate with U.S. Treasury bonds selling off hard over the past few days. The iShares 20+ Year Treasury Bond ETF (TLT) has sliced through uptrend support and its 50-day moving average for the first time since October. That marked the beginning of a long five-month sell-off in Treasury bonds and a steady increase in long-term interest rates. If people were concerned about the risk of a double-dip recession, they'd be snapping up bonds instead of selling them.

 

Between an economic slowdown and a potential debt default, traders are obviously focused on the greater evil.

 

Check out Anthony's new investment advisory service, The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.

 

The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. Feel free to comment below.

 

35Comments
Apr 7, 2011 4:06PM
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Shut 'er down, pronto!

 

As soon as it goes down, the govenors of the states need to convene a continental congress and take a vote of no confidence in the present United States federal government and then we start again with a much more simple and most importantly citizen/voter mandatory system instead of the corporate/lobby based one we now have!

 

A system that does what almost all citizens want..................for one, not allowing new citizens to immediately collect from a system that they or their forefathers never put money in!

 

You know: what any public servant should understand without having to express his personal private emotional plans of a utopian society!

Apr 8, 2011 9:22AM
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Shut the government down asap! It might show us how useless so much of it is. Obama does not want to live within a budget. Obama wants to continue to have a blank check. It is about time someone took the checkbook away from him.
Apr 8, 2011 12:03PM
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I just heard on the radio about the different people that will lose income if the govt .were to shut down mainly the military and vendors and the like, but then they said oh by the way the senators and house will still be paid which i think is a bunch of crap we are the ones suffering with the high prices of everything and they don't have to pay for anything we lose and they get paid go figure.
Apr 8, 2011 9:57AM
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all i have to say is someone better do something about our poor dollar and the speculators on the imaginary oil problems they came up with, this is bull$hit already.
Apr 7, 2011 3:40PM
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We seniors may not get our SS but obamy can't print more worthless dollars and spend money he thinks we the people owe him/the government.  We the people do not owe the government billions/trillions to spend on what our supposed elected leaders want to waste it on.  We the people/government should only spend dollars that will protect this country/military, build the "Great Wall of the America's" like the Great Wall of China to keep out "ILLEGALS/DRUGS from mexico.  Mexico's president needs to look south of his borders at the weapons that are coming in not north at us.  He needs to stop allowing the cartels to take over  his country, bring in the air force and drop bombs on where they are and do it 24/7 until they leave or give up.
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Shutdown what shutdown???

I thought Helicopter Ben Bernanke was going come charging to the rescue with $15 trillion dollars of printed money to pay off the national debt?

Hey Bernanke came to the rescue of Wall Street bankers and printed $9 trillion dollars for them isn't saving the US economy worth $6 trillion more???

After all the US economy is TOO BIG TO FAIL right???

Why doesn't the Federal Reserve just super charge those printing presses and solve all our troubles??? Then Congress can go home for the year on a victory note and raise tons of money as they brag about saying the US from disaster.
Apr 8, 2011 12:52PM
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If Democrats and Republicans want to cut spending, here's a really good idea...cut the fat!. Does Washington need so many politicians to run the country?.  This country needs to drastically reduce the size of government, think of the huge savings by doing that!.  Alas!, the powers that be will never consider that, they would rather inflict pain and hardship on the backs of the American taxpayers.  Know this, this country cannot continue with the same old, same old system of government. It must be re-constructed into a much smaller, more efficient government with only the welfare of the people in mind. No catering to special interest groups, and we must stop trying to be the savior of the world, doling out billions of dollars to other countries, even though some may truly need it, we cannot afford it!, the well has run dry.  Barring any last minute miracle there will be a government shutdown, and there will be more shutdowns in the future unless government re-construction becomes a reality. 
Apr 8, 2011 11:46AM
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Texas Linda - go back to school !  You make it sounds so simple [like a liberal].

 

Kahn & Wayward - Thanks for bringing 'race' into the topic [someone always does].  You think you know about being an American?  Try asking out forefathers and early folks who fought and settled this country and they will tell you "what an American is" because it has been lost with all the moral cowards and thieves that plague the Congress & Presidency now.   Our forefathers would be disgusted at what this country has become.

Apr 8, 2011 9:54AM
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I just think it is so funny to hear the DEMS blame the REPS for not passing (which they have) a budget bill that they were suppose to last year when they held control over the house, senate, and the oval office.  What a bunch of idiots the left are when they make these stupid accusations.  Just goes to show the extreme agenda that the left is up to!!!!!!!!!!! 

Apr 8, 2011 12:32PM
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They just don't understand. There is already reduced spending in my home. I have a stack of bills on my desk that I can't pay until I'm sure I'm going to get a paycheck next week that is to go for my rent. I'm going to the supermarket after work and if there is no deal. I'm not buying chicken and noodles. It will be beans and rice this week. They also need to explain to my kids why they won't be getting candy for easter if I miss a paycheck. One gray haired old may said on TV last night "If the government does shut down; I don't think it will have much of an impact." Let me tell you I cried myself to sleep last night.

Apr 8, 2011 9:30AM
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Hopefully, then it will hurt the very people who are behind this anti Americanism.These dirt bag on the street and in corporate america could care less about Americans
Apr 7, 2011 2:52PM
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Anthony,

Do you think this shutdown will help contribute to what is starting to look similar to last year's "head and shoulders" pattern?  When and where does it end, and which direction does the market go from there?

To me, it looks as if stocks are going to be at best stagnant for a while between the S&P 1250 and 1350 marks.  I am fretting a little about the prospect of high oil prices and govt. deficit reduction sending the market south again.  But... I think there's too much money in the system and too much interest in medium-term (6-12 month) buying trends to send it reeling.  At some point I see the commodities bubble bursting and higher interest rates sending international economies (most notably China) into economic downturns, which will of course hurt the American economy and stock market both.  Hmm... sometime early next year?
Apr 8, 2011 11:22AM
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Once again...We are in bubble mode. We are in denial mode...The real problem will not be tomorrow, but into the future. I'm not smart enough to have the answers...I hope some of our elected officials are...To me every body has an angle and/or is in somebody's back pocket. Scary crap.
Apr 8, 2011 9:58AM
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OMG!  MSN now has a "Doomsday Clock" ticking on it's homepage......MSN, you should be ashamed!

Does anyone in their right mind think these political fools are really going to NOT reach a deal given the delicacy of the national economy?  C'mon sure they are. 

Now we know why Americans love their Psychiatrist more than their own spouses!

 

GROW UP MSN-----  "Doomsday Clock"     tacky......

Apr 8, 2011 10:39AM
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Kahn is an elitist piece of garbage who, like many others, cannot see past his own pale and very thin skin! People like him turn these threads into a piece from the Weekly World News instead of the thought-provoking material arguments that we all need in this day of rage. Sell your racism to someone else buddy! I have lived here all of my life, am serving proudly active duty, and am in love with a lady (my wife) who hasn't been here long but is twice the American you will ever be!!!!!

 

YOU ARE A BIG PART OF THE PROBLEM!!!!

Apr 8, 2011 1:45PM
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This Congress and Senate is acting immature. Even children can come to a compromise.
Boys and Girls of the U. S. Government, the secret word for today is Sh  are. Sh are. Share!

How to fix the Government:
#1. President Obama send those bad boys and girls to the corner. If you behave like a child, you need to be treated as one.
#2. President Obama, set our oil dependency free. We can no longer afford to buy oil from other countries and ship it here. Isn't that double dipping at the barrel at the taxpayers' expense? We have perfectly good oil under our noses in wells that have been capped, ready to produce, since the 1970's. This oil can make prices at the pump go down. Because we aren't an OPEC nation, then we aren't regulated under them as to what we set our oil a barrel for.
#3. Pass a bill that will allow people to take a credit on taxes if they use the United states Postal Service for first class mail. If everyone would sent 20 letters to people using a 44 cent stamp, then the Post Office will be back on track. Those twenty letters would help keep employees and cause for new jobs. (excluding advertisement and bills.)
#4. Make the IRS not give Child Credits for people who don't work and pay into the system, including disable people under 65 on SSI.  people who itemize shouldn't take the credits anyway.
#5. Cap all credit card interest rates at one low rate affordable for the banks and consumer, like 12% of purchases. And don't let them loophole around it. Also fix the credit scoring industry.
#6. Quit buying items that are too high price to pay if you were a regular person for use in the government.
#7. Why can't Mrs. Obama cook, clean, and plan all the party events herself. We the women of the country do this.
#8. Do we need all these people or organizations getting grants that are never used. Like USDA gives grants to Communities to help the community out, but it gets to the community as a loan, so who wants to pay for a loan? Useless grants. Then there are useless projects.
Whatever happened to building roads and bridges?
#9. There are alot of Departments in the U. S. government and more than less do some of the same jobs. These Departments need to eliminate jobs that already are being done by a different department. This would save the taxpayers lot of money.
#10. Make the Congress and Senate both put God first in all they do. It is under GOD that this country was founded. It is up to the Houses to make sure that GOD IS LEFT IN THE RUNNING OF THE GOVERNMENT. Then I would pass a law saying that everyone would have to share the blame if sharing and compromising is not carried out in a uniform manner. Other words, they would be grounded.

Apr 8, 2011 11:45AM
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  Here we go again another media moron using the good old, "lets scare everyone to death". Hey youngster this isn't the first time the Government has shut down. Trying doing some good reporting and look up some facts.
Apr 8, 2011 12:56PM
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I hope I get my meds in time. Nothing worse than a Viet-Nam vet with PTSD, unmedicated, with a gun collection....
Apr 8, 2011 2:19PM
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the entire exercise is a joke. there talking nickels and dimes,when they should be talking real dollars. they should be ashamed of themselves.
Apr 8, 2011 4:46PM
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