Matt Slocum/AP Photo
- The US government is more likely than not to shutdown by the end of the month, Goldman Sachs warned.
- But stocks could rebound quickly from any ensuing volatility, stock market experts say.
- Congress has a long history of missing deadlines to pass spending bills.
The US government looks it's headed for a shutdown as policymakers reach an impasse on the nation's budget for the next fiscal year. But the stock market's top strategists aren't much fazed by that possibility and there's a high chance investors could come out of the situation doing just fine, experts say.
To avoid a shutdown, Congress needs to pass all 12 of its spending bills for the next fiscal year by September 30, something it's historically been quite bad at. The last time it passed all of its spending bills on time was in 1997, according to an analysis from Charles Schwab.
The odds of a shutdown have already surpassed 50%, according to Goldman Sachs Research chief political economist Alec Phillips, with so far zero spending bills passed as policymakers spar over government budget constraints.
That can spell trouble for the market, which could take an immediate hit from a shutdown event. Stocks in September are already on track to post their worst monthly losses since the start of the year. And the last time Congress failed to strike a deal over the budget in time, the S&P 500 dropped 2.7% on the first day of the shutdown, according to Renaissance Macro data.
But there are promising signs that investors will be able to quickly recover any losses.
In the past 20 government shutdowns, the S&P 500 stayed relatively flat, with the benchmark index losing an average 0.4% the week before a shutdown and gaining .1% by the end of a shutdown, according to a Reuters analysis of CFRA Research data.
And in some cases, stocks actually ended the shutdown period higher, with the market gaining a net 10% following the 2018-19 shutdown, according to Renaissance Macro.
Shutdowns lasting five days or more have also been known to see a quick market rebound, according to a 2021 Dow Jones analysis. On average, the S&P 500 had already moved into positive territory within one month of the shutdown. Shutdowns themselves are also relatively short. The last government shutdown, which was the longest-ever, lasted for 35 days.
"In our view, any stock market pullback likely would be muted by the knowledge that the direct impact of past government shutdowns has been quickly reversed after the reopening," Wells Fargo strategists said in a recent note.
Rising recession risk
Though a shutdown might not be a significant drag on the market, analysts are concerned it could exacerbate other factors weighing on the US economy in the coming quarter. That includes a weakening labor market, rising interest rates, and the resumption of student loan payments, which could pinch American consumers and hike the chances of a downturn.
A shutdown could weigh on economic growth, dragging down year-over-year quarterly GDP by 0.2 percentage points per each week it lasts, Goldman Sachs estimated. The bank said it expected a shutdown to last two to three weeks.
"I think the government shutdown itself isn't a major issue from a stock market perspective," Truist co-chief investment officer Keith Lerner said to CNBC on Monday. "But I think the challenge for the market right now isn't any one thing, it's all the obvious things we're talking about," he said, adding that stock right now are lacking "upside" catalysts.
"[W]e encourage investors to look beyond the market's twists and turns in the weeks before, during, and immediately following a potential shutdown by aligning with our more defensive portfolio guidance, positioning for an economy approaching an anticipated recession," Wells Fargo strategists wrote in their note.