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.
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.
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!
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.
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!!!!!!!!!!!
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.
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......
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!!!!
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.
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