Before going into the convoluted politics of this coming week and the efforts to avoid a government shutdown, I wanted to share a study that the Fundstrat’s data science team put together looking at the impact on markets of past government shutdowns. The bottom line is that while shutdowns create headline risk, and leave foreign governments perplexed over US policy making, the shutdowns have little impact on markets.
Here are the statistics of all US government shutdown.
- We calculated the S&P 500 performances before and after a government shutdown.
- For each government shutdown, we also categorized it as “initial” or “follow-up”. “Initial” means that government shutdown was the “first” shutdown during that fiscal year.
- We also included the government control (President/Senate Majority/House Majority) in the table.
And below is a quick summary based on the data above.
While past market reaction would indicate that a government shutdown would have limited market impact, a shutdown does create headline risk and raises issues that range from plans to visit a National Park that may be closed to the concern Fed Chair Powell raised last week that the FOMC may not have all the data they want to make the next rate decision on November 1.
After a frustrating week for House Republicans where for the third time Speaker McCarthy was unable to get 218 votes to move forward with the Department of Defense (DoD) funding bill, out of frustration he sent Congress home until tomorrow.
The Speaker had a late-night meeting on Wednesday to hammer out an agreement to move forward on DoD which is usually a bipartisan easy lift for the House leadership no matter the party. After caucusing, and the Republican leadership confident they had the votes, they brought the Rule to consider the bill to the floor and it lost once again.
Over the weekend Speaker McCarthy and his leadership team worked with their conference and came up with a new strategy, but it has some of the same old problems. Last week when the DoD budget was defeated one reason given by one of the NO voters was realizing that the bill contained money for Ukraine, specifically $300M for training. At first the Speaker said he would take it out, but after pushback from some of his Members as the weekend strategy was put together, McCarthy said that the Ukraine money would remain in the bill.
The new strategy to be tried this week is to put yearlong spending bills for DoD, Agriculture, Homeland Security, State Department, and foreign aid all into one Rule that would allow for each bill to be amended and then each bill voted on separately. The Speaker told the press that passing these four bills, with deep cuts in many of the discretionary programs, the most conservative members should be willing to allow a short-term Continuing Resolution (CR) to pass but that position has many skeptics.
The job for Speaker McCarthy was made even more challenging when former President Trump went on to social media to declare that if the Republicans don’t get all the cuts they want he supports a shutdown.
If the House remains deadlocked the Senate is developing a bipartisan plan to keep the government open with a 60-day CR. The Senate CR would fund the government with flat line spending using funding levels from the current fiscal year, plus the Senate would add the money for Ukraine and disaster assistance that President Biden had requested. The idea is for the Senate to pass the bill and then see what the House does. Could this be a strategy that pushes the House to find a bipartisan path that works around the most conservative Republicans by getting Democratic votes or does Speaker McCarthy stick with the Republican only strategy that increases the chances of a shutdown but helps him to remain Speaker?
I will be posting updates during the week as developments warrant.
Republican Debate
On Wednesday night the Republican National Committee will host a second debate for the Party’s Presidential candidates – except the frontrunner will be missing. Six candidates have qualified to be on the stage at the Ronald Reagan Library in California.
As I wrote before the first debate, while I have never prepared a candidate for a Presidential debate, I have done debate preparation for US Senate candidates, and if I were advising former President Trump I would 100% concur with his team that advised against participation in the debate. His lead in polls has grown to 40 points and in my view, he would have nothing but downside risk by being on stage with those who want to be his replacement if he stumbles.
If Mr. Trump were on the stage all the arrows would be pointed at him; with him not on stage, they will likely go after each other. All the candidates will be looking for a breakout moment to make them the main opponent to the former President.
In my view Governor Haley did the best in the last debate and that seemed to be the consensus of most observers; this could put a target on her back. However, all candidates will be trying to give the quote that makes the headlines. At this point the base seems fully committed to President Trump and each candidate on stage will be trying to get these voters to take a second look at another candidate – a daunting task indeed.