Shutdowns are familiar—but this one has an unfamiliar tone

Shutdowns aren’t a rare occurrence for the U.S. government, and they’re often a lot of bark without a big bite—but, this time, statements from President Trump suggest that this shutdown’s teeth may sink deeper.

The federal government officially shut down at midnight, Oct. 1, after Republicans and Democrats in Congress couldn’t agree on a short-term deal to keep the government funded. During a shutdown, essential services like Social Security, Medicaid and Medicare continue, while nonessential services such as National Parks may be limited or closed, due to staff deemed nonessential being furloughed. The impact of a shutdown depends on the length but is usually temporary, according to experts. The last shutdown, which was from Dec. 21, 2018, to Jan. 25, 2019, lasted 34 days. Wall Street traders are anticipating that the current shutdown will brief and will have little effect on the economy—a sentiment that caused the S&P 500 to close at a record high on Wednesday.

Furthermore, much of this shutdown isn’t unique, such as the politicians on both sides of the aisle pointing fingers, noted BOK Financial® Chief Investment Strategist Steve Wyett.

“The rhetoric and posturing by the Democrats and Republicans going into this shut down is similar to past versions,” he explained. “Both are claiming the high ground on their stances and point to the intransigence of the ‘other side’ as forcing the government shut down. The calculus is about how the court of public opinion will play out and which party might benefit.”

However, the White House’s reaction to the shutdown is a wildcard and it could have both short- and long-term impacts. As Wyett said, “This shutdown does feel a bit different as the range of possible responses from President Trump seems a bit wider than past events.”

Some federal cuts could be long-lasting
The biggest impact may be from the implied permanency of some federal job cuts. On Sept, 24, the Office of Management and Budget released a memo saying that federal agencies should consider reducing employees in programs, projects or activities that “are not consistent with the President’s priorities,” if their funding expired at the deadline and there was no other funding source available. Then, on Oct. 1, White House budget chief Russ Vought said that these permanent layoffs could happen as soon as within one or two days.

Permanent layoffs would be a significant difference from previous shutdowns, when non-essential federal workers were furloughed but returned to their jobs once the shutdown ended. This more permanent move “raises the stakes and could add additional pressure to reach a resolution quicker,” Wyett said.

Moreover, with the implied permanency of some federal job cuts comes the message that the programs, projects and activities associated with these jobs would also be affected. Speaking about Democrats on Sept. 30, President Trump said, “We can do things during the shutdown that are irreversible, that are bad for them and irreversible by them, like cutting vast numbers of people out, cutting things they that they like, cutting programs that they like.”

Already, the White House has started to pause or cancel billions of dollars in funding meant for Democratic-leaning states, including climate-related projects in 16 states that voted for Kamala Harris.

Investors should stay the course
Yet even with this uncertainty over what’s ahead and stock market highs on the shutdown’s anticipated brevity, investors shouldn’t make any moves based on the here and now but rather stay true to their long-term objectives, experts said.

“While short-term volatility may increase, long-term investors are encouraged to maintain discipline and avoid making impulsive portfolio changes,” said Matt Stephani, president of Cavanal Hill Investment Management, Inc., a subsidiary of BOK Financial Corporation. “Emotional reactions during uncertain periods often lead to suboptimal decisions. Staying focused on long-term goals remains the most prudent approach.”

“Emotional reactions during uncertain periods often lead to suboptimal decisions. Staying focused on long-term goals remains the most prudent approach.”

- Matt Stephani, president of Cavanal Hill Investment Management, Inc.

Moreover, looking historically, the aftereffects of shutdowns have been resoundingly positive for financial markets. Since 1976, there have been only three instances of stocks being negative twelve months after a government shutdown, out of the 22 shutdowns that have occurred since then.

That’s because the solution to a government shutdown is usually more government spending, which though bad for the deficit, means faster economic growth. “Does this mean higher government spending is the key to economic growth?” Wyett posited. “Of course not. However, higher government spending is additive to growth as measured by gross domestic product (GDP), and in the end, stock investors like growth a lot more than austerity.”

We will continue to monitor the shutdown and keep you informed.