How will a government shutdown affect the stock market?

The likelihood that a government shutdown would start this Sunday is rising, which has alarmed some investors.

The stock market isn’t anticipated to be significantly affected by a potential shutdown, but experts believe it is to blame for the S&P 500’s more than 5% decline this month, to 4,275.

According to Marc Zabicki, chief investment officer of LPL Financial, it’s “one of the reasons why you’ve seen the market weaken.” However, “I don’t know that you’re going to get any stark reaction from asset markets come Oct. 2 next week,” the analyst said after the potential shutdown starts. I believe that pricing have already largely accounted for it.

The stock market is declining; why?

Although the impending shutdown is a factor in the current market decline, it’s not the only one.

According to Jeffrey A. Hirsch, CEO of Hirsch Holdings and editor-in-chief of the Stock Trader’s Almanac, September is also a historically dismal month for equities.

According to Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, there are “lots of other items going on” that are having an impact on the market, such as rising interest rates, impending student loan payments, the United Auto Workers strike, rising gasoline prices, and more.

“We’re in a very volatile time right now,” Silverblatt declared.

What transpired during past shutdowns of the markets?

Since 1990, there have been six total or partial government shutdowns. The most recent, in late 2018 and early 2019, took more than a month to resolve while some were resolved in less than a week.

According to a Wednesday note from Paul Hickey, co-founder of Bespoke Investment Group, when comparing the S&P 500’s median performance one month after the shutdown to one month prior, the benchmark increased by a median 5.5% with positive returns five out of six times.

The memo states that previous shutdowns “have been a lot of sound and fury signifying nothing, like the people that occupy the chambers of Congress.”

The impending shutdown is thus “more of a headline event than a bottom-line event,” in the words of Sam Stovall, chief investment strategist at CFRA Research. He claimed that previous closures had “angered tourists more than disappointed traders.”

This time around, any risks?

Although the S&P 500 tends to decline before and during the early stages of longer shutdowns, a report from Wells Fargo on September 13 notes that “stocks did not take long to regain composure after the government reopened in each instance.”

This time, however, a shutdown runs the risk of exacerbating other potential economic body blows, making equities more vulnerable to volatility and prolonged downturn.

The authors of the paper said that due to hardened attitudes in a Congress that is becoming more polarized, a shutdown, should it occur, could potentially endure for at least a few weeks.

Zabicki of LPL added that Washington’s polarization “increases the risk that something could go wrong” and that “the longer it goes, the more difficult it will become economically and also from an asset market perspective.”

On the other hand, he asserted that recent history demonstrates that “these are typically not long-lasting events.”

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