All races eventually end. Unfortunately, unlike a motor race where there is a clear winner, the race to end the Government shut down doesn’t have a clear winner. The good news, however, is that it’s over. Last Friday, January 25th, President Trump announced that a short term funding agreement had been reached in Congress, ending the longest government shut down in history after 35 days. In a previous post I discussed how, with the exception of the ~800,000 government employees that would have delayed paychecks, most Americans would see little change to their daily lives during a shut down. Further, I showed that when looking at past shutdowns, we’ve seen the S&P 500 go up about half the time and go down about half the time. The median return during a shut down is 0.0%, and the average is -0.4%.
So now that we’re on the other side of the shut down, how did this one play out?
As you can see, the S&P 500 was up over 13% over the course of the shutdown, making it the best shut down we’ve ever had (from a performance perspective that is). Granted, this chart shows correlation but certainly not causation. There were many factors driving markets during the shut down and I’m not trying to suggest that the shut down drove the market up. Quite the opposite in fact. The purpose of my original post was to remind readers that despite their headline grabbing nature, they really don’t mean much for the economy or the markets over the long term (remember this was the THIRD shut down of 2018).
In fact, the Congressional Budget Office (CBO), a non-partisan government agency created to provide Congress with independent analysis of economic and budget related legislation, just today announced their estimates of the economic cost of the shut down. The full article can be found here. They estimate that about $11 Billion worth of economic activity was lost during the shut down. Delayed contracts, purchases, licenses, and paychecks are just some examples of things that didn’t happen while the government was closed. However, they also estimate that about $8 Billion of that lost activity would be recouped eventually (think back pay, buying stuff they planned to earlier and the like). This means that only about $3 Billion would actually be lost. To put that in perspective, the US Economy is estimated to have produced roughly $20 Trillion of activity in 2018 (we don’t have final numbers yet because of the shut down, of course). $3 Billion is 0.015% of the US economic output. It’s a rounding error.
The real impact of a shut down is on the families of Federal employees, and in the damage done to consumer and business confidence. Time will tell how much that damage will impact the economy or the markets, if at all. Sadly, the agreement only funds the government until February 15th. If Congress can’t come to a border security deal by then we may be facing yet another shut down. If you’re a Federal employee it might be a good time to work on your emergency fund. For everyone else, the good news is that shut downs haven’t seemed to matter, historically. Is there an echo in here?