Global investors are bracing for the consequences of the latest government shutdown in the United States, as Congress failed to reach an agreement on the funds needed to keep the government running.
The dollar slipped 0.2% against the Japanese yen, and US equity futures declined as the midnight funding deadline came and went, triggering the US government’s first shutdown in nearly seven years. The budget office of the White House ordered agencies to begin executing plans to halt all but essential duties, disrupting the jobs of hundreds of thousands of Americans and upending many public services.
The muted moves are generally in line with the situation that occurred during previous government shutdowns, where solutions to avoid long-term economic damage would be introduced shortly after political statements. However, Wall Street largely ignored this.
But the wrangling among Congressional leaders seems more pointed this time, raising the potential for a protracted standoff that could damage the world’s largest economy. The Trump administration’s promise to carry out mass firings of federal workers, rather than furloughing them, would send jobless claims rising when employment already looks fragile.
The main macro impacts are reflected in the predictions of the labor market and interest rate trends. Government data will cease to be released. Just for this week, this will mean that unemployment benefit application data, factory order data, and the September employment report data will all be unavailable - these are all key data used by Wall Street to predict economic growth and interest rate trends.
“This shutdown could have bigger implications than usual because the stakes have been raised so high even before the event,” said Steve Sosnick, chief strategist at Interactive Brokers.
Another complicating factor is the equity market’s extended bull run has pushed valuations to levels associated with past bouts of euphoria. With volatility subdued and traders positioned to take advantage of any year-end rally, any wobble in asset prices could lead to forced selling that would exacerbate a downturn.
If the impasse drags on, analysts expect gold to retain its allure as a haven, even after pushing to an all-time high near $4,000. Part of the rise owes to weakness in the dollar, which has retreated in past shutdowns. A further drop in the dollar could bode well for the Japanese yen, and possibly the euro, according to ING Bank. Long-dated Treasuries have benefited from prior shutdowns, presumably on bets for economic weakness.
“Coupon and debt service payments are not at risk,” Monica Guerra, head of US policy at Morgan Stanley Wealth Management, wrote in a note Tuesday. “Given high yields, US Treasuries remain attractive, and we encourage investors sensitive to government shutdown risk to opt for increased US Treasury exposure.”
For those who want to stay active in the stock market, here’s what to watch for under the hood.
Defense
Defense contractors, including RTX Corp., L3Harris Technologies Inc. and AeroVironment Inc., have been riding high as federal expenditures for munitions, drones and a missile-defense project bolster profits. The shutdown could temper enthusiasm for those stocks, all of which closed Monday at record highs, as well as for peers like Boeing Co. and Lockheed Martin Corp.
“We don’t expect much fundamental impact to defense firms, but sentiment may wane,” TD Cowen analyst Gautam Khanna told clients last week.
Seaport Global Securities raised its recommendation on shares of General Dynamics Corp. to buy from neutral this week, saying any pullback in the stock due to a shutdown would give investors an entry point.
Government Services, Airlines
Companies like Booz Allen Hamilton, Leidos Holdings, and CACI International Inc., which provide consulting and technical services to the government, may not perform as well. According to Truist’s Tobey Sommer, when the government shuts down, the income of these companies will be impacted, but the effect is usually minor. Any prolonged shutdown could affect profits.
In addition, there are airlines that rely on about 2% of their annual revenue on government-funded tourism projects. If this source of income is interrupted for a long time, it will cause further damage to an already struggling aviation industry. Even worse, according to Jefferies’ Sheila Kahyaoglu, thousands of federal employees who lose their regular salary income may reduce the frequency of their leisure trips.
In the past, both groups of companies have sold off just before a shutdown and bounced back while it’s ongoing, Kahyaoglu wrote. The S&P 1500 Airlines Index fell 1.9% Tuesday, closing out its worst month since March, while CACI and other services contractors have faced volatility on worries about a broader push to cut government spending.
Cyclical Stocks
Here, a shutdown’s impact on the economy is key. If it lasts long enough to meaningfully slow growth and send unemployment higher, it will threaten sentiment in sectors like industrials and financials, said Matt Gertken, chief geopolitical strategist at BCA Research. Those industries are home to firms whose fortunes are closely linked to the US economy.
“If you had a long shutdown, it could simply call attention to the many risks that are on the radar,” Gertken said.
Industrial giants like Caterpillar Inc. and Deere & Co. have rallied from April lows, but the sector still faces tariffs and a slowdown in the manufacturing economy.
Shares of financial firms, from banks like JPMorgan Chase & Co. to asset managers like Apollo Global Management Inc., saw volatility earlier this year amid worries about the strength of the economy. Companies closely linked to the health of the consumer, such as fast-credit provider Affirm Holdings Inc., are prone to especially large swings.
The Bloomberg Economics company estimates that during the government shutdown, 640,000 federal workers will be forced to take unpaid leave, which will push the unemployment rate up to 4.7%. Even after the shutdown ends, if Trump fulfills his threat to permanently lay off some staff, the unemployment rate will remain at a high level.
Investors worried that cyclicals will take a hit may rotate into defensive corners of the market like health care and utilities, Gertken added.
Brace for Volatility
The broader equity market has a habit of ignoring budget fights: The S&P 500 Index has barely moved on average across the last 20 shutdowns, according to data compiled by Truist. Wall Street pros are holding steady in their portfolios this time, too.
But a short-term bump in volatility becomes especially likely if data delays make the outlook for interest rates less clear, Jennifer Timmerman of the Wells Fargo Investment Institute said in a note. The Bureau of Labor Statistics would likely delay Friday’s payroll report, and a prolonged budget fight may imperil inflation data scheduled for Oct. 15.
According to RBC, reports from private institutions such as the Institute for Supply Management (which plans to release data on manufacturing and services later this week) will have new significance.
On Tuesday, the S&P 500 index managed to shake off market concerns and rose by 0.4%. However, in the longer term, any shock to the economy could potentially weaken the current cooling uptrend.
“The market is struggling to find some momentum up here,” said Mark Malek, chief investment officer at Siebert Financial. “It’s hard to say that it’s a positive for this market.”
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