What to Know About a Government Shutdown

What is a government shutdown?

A government shutdown occurs when Congress fails to pass a new bill to outline spending across the federal government before the previous bill expires. As a reminder, Congress controls all government spending.

What happens during a shutdown?

Non-essential governmental services are, or will be, curtailed. Items deemed essential, including emergency services, travel, and military operations, will continue. Social Security, Medicare and Medicaid will also operate normally. 

Some government employees will be furloughed or face layoffs, and remaining government employees will work without pay until a spending bill is passed. The employees that continue working during the shutdown will receive backpay for hours worked upon passage.

Most projects that rely on government funding, including construction work, will be paused. 

Additionally, some economic data releases will be halted, which can increase uncertainty.

What will it take for a resolution?

One way to resolve a shutdown is for Congress to pass a temporary funding bill, known as a Continuing Resolution, that funds the government for a short period of time while negotiations continue.  Passage of that resolution is subject to a filibuster, and 60 votes are required to break a filibuster.

The other option for a resolution is passage of a permanent funding bill. A permanent bill requires just 51 votes in the Senate. Republicans currently hold a majority in the Senate with 53 seats – meaning that a budget could be passed via a party-line vote. To date, the Republican majority has not come to an agreement on a passable budget.

As a result, an end to the shutdown will require either Democratic support of a Continuing Resolution or a Republican consensus on a permanent budget.

How does a shutdown affect financial markets?

Shutdowns have become more common in recent years. The most recent shutdown occurred during Donald Trump’s first term in 2018/2019. It was the longest shutdown on record, lasting more than a month.

Shutdowns generally have little impact on financial markets. 

Equity market performance is driven by earnings expectations and valuations. Some companies that rely heavily on government spending may be affected during an extended pause, but this is the exception not the rule. Negative news flow could theoretically impact sentiment (and thus valuations), however historical returns during shutdowns refute this argument. 

The S&P 500 Index rose during the last five government shutdowns. During the 2018/2019 shutdown, which lasted 35 days, the Index rose almost 10%. The largest decline occurred in 1979, when the Index fell 4%. 

Similarly, Treasury Bonds have exhibited little reaction to shutdowns. US Treasurys have the potential to be impacted by debt ceiling disputes, but the debt ceiling was increased earlier this year, so default risk does not apply in this instance.

To summarize, while a government shutdown creates an abundance of headlines, its impact on financial markets is generally minimal. 

Please reach out to the Sunflower Bank Wealth Management Team if you have any questions or concerns.