Why a shutdown shouldn’t shutdown the rally

Thought of the day

by Chief Investment Office 19 Jan 2018

Stocks were undermined by late-stage negotiations aiming to avert a US government shutdown, with headlines alternating between relief and pessimism. The S&P finished down 0.2%, and the VIX “fear gauge” hit a six-week high of 12.4.

A failure to strike a funding deal would force a midnight shutdown of many Federal agencies, and send negative signals to both equity and bond investors. But for now we believe investors can look through the political noise:

  • Markets have historically performed positively when the government has been shut down. The US government has shut down 12 times since 1980, yet the S&P delivered positive returns two-thirds of those times, with an average return of 0.3%.
  • Government services deemed “essential” will continue, and even those workers placed on “furlough” have historically always been paid retroactively. Confidence that this will be repeated should mean that consumption doesn't stall. A longer shutdown would start to do more serious damage, but proposals like Senator Chuck Schumer’s “very short-term bill” offer an exit. The debt ceiling issue is also not tied to the shutdown, unlike previous episodes.
  • A political solution remains possible. With control of all three branches, and looming 2018 mid-term elections, the Republicans have a strong incentive to strike a deal. President Trump has previously signaled his willingness to sign a compromise deal.

We remain positive that a showdown shouldn't harm markets. An actual default remains a distant outlier. We remain risk-on with our tactical asset allocation, with an overweight on global equities.

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