With a potential government shutdown and debt limit showdown both looming in the days and weeks ahead, investors are growing concerned about how uncertainty in Washington could spill over into the market, and though stocks have only posted small returns during past shutdowns, experts agree the United States’ first debt default in history could be much worse—especially for government-exposed stocks.
In the 14 government shutdowns since 1980, stocks have posted “very small” returns leading up to and during government shutdowns, generating median losses of 0.1% on days the budget authority expires—which would happen Thursday if lawmakers don’t strike a deal—and staying virtually flat throughout the shutdown periods, Goldman Sachs reported in a Tuesday note.
However, the last shutdown in December 2018 was a “notable exception,” the analysts wrote, pointing out concerns over monetary policy helped push the S&P 500 down 2% and noting the underlying environment has historically been “more important” for stock-market performance.
Hardest hit industries have been information technology—including tech giants like Apple, Microsoft and Intel—as well as energy stocks, which tend to outperform during periods of economic growth but fall hard amid market weakness.
Goldman political analyst Jan Hatzius expects lawmakers will authorize a spending measure before Friday to avoid a government shutdown, but he warns the ongoing debt limit showdown is beginning to look as risky as the 2011 debacle that led to credit agency Standard & Poor’s downgrading the nation’s sovereign debt rating and tanked the S&P 500 as much as 13%.
However, it’s not all bad news: Stocks weren’t fazed by the latest debt ceiling showdown in 2013, and they bounced back within weeks in 2011 despite the European debt crisis also plaguing markets.
In its Tuesday note, Goldman pointed out companies drawing at least 20% of their revenues from government spending are generally most vulnerable to a debt crisis-induced stock market decline. They identified a basket of 83 such stocks that underperformed the S&P by an average of 1 percentage point during the latest debt limit showdowns, comprising defense firms Lockheed Martin and Northrop Grumman, alongside insurers and healthcare companies like Humana, Anthem, Gilead and CVS Health.
With a shutdown deadline less than 48 hours away, lawmakers are still in a bitter standoff over how exactly they’ll pass a measure to fund the government. Senate Republicans voted Monday evening to block a House-passed continuing resolution aimed at keeping the government open through December because it included a provision to suspend the debt limit for another year. Despite voting to suspend the debt limit three times under former President Donald Trump, many Republicans have blasted efforts to do so again, citing concerns over heightened inflation. Meanwhile, Treasury Secretary Janet Yellen told House Speaker Nancy Pelosi (D-Calif.) on Tuesday she projects the Treasury will run out of cash to pay its bills by October 18 if lawmakers don’t act to raise or suspend the debt limit. “Failure to act promptly could also result in substantial disruptions to financial markets, as heightened uncertainty can exacerbate volatility and erode investor confidence,” Yellen wrote.
What To Watch For
On the Senate floor Wednesday morning, Majority Leader Chuck Schumer (D-N.Y.) said he would introduce a standalone continuing resolution on Wednesday to fund the government until December. “We can move this measure quickly and send it to the House so it can reach the President’s desk before funding expires,” he said. Though they haven’t yet budged on the debt limit, Republicans have signaled support for a standalone funding measure to prevent a shutdown.
“It’s a sign of the dysfunctional times that Republicans won’t go along with Democrats in passing a debt ceiling increase, which is something that has been done many times in the past in a bipartisan manner,” Chris Zaccarelli, the chief investment officer for Independent Advisor Alliance, wrote in a Wednesday note—calling the nation’s current debt load of more than $28 billion “staggering,” but still manageable. “Unfortunately, the financial system is somewhat held hostage by the negotiations this week on the debt ceiling.”