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“Will the government shutdown impact the stock market?”


Today’s question is on the news story that has been front and center for 3 weeks now, the government shut down. And specifically, on how the shutdown could impact the stock market.

 Today’s question is:

“Will the government shutdown impact the stock market?”

 Transcript: The Government Shutdown’s Impact on the Stock Market

Since the current shutdown began on December 22nd, investors have been on a wild ride in the stock markets. Christmas eve saw a large decline in the market, that put the U.S. stock market into bear market territory with a 20% decline from the year’s highs.  But since then, markets have recovered and are up nearly 10 percent from their lows.

So, if this shutdown continues on, should we expect more of the same?

From an operation perspective, the stock markets will function fine without the government. In fact, historically the stock market has weathered previous government shutdowns pretty well, with an average decline during shutdowns of the last 40 years of less than a half of percent.  

From an economic perspective, most of the companies that are publicly traded are very large, and unlikely to be dependent on the government services, like loans from the government’s small business administration that are halted by the shutdown. Worse case scenario for these large companies seems to be a small reduction in consumer spending while the shutdown continues.  

There may be higher risks for investors who have concentrated holdings in companies in specific industries.

For example, craft breweries have been in the news because they are unable to get government approval for new beer recipes and labels. Some breweries may be forced to dump their beer if the shutdown were to last too long. Now, very few craft breweries are publicly traded companies, and the ones that are public are very large, so they can probably withstand the costs of dumping a few batches of beer. So if you have a large stock position in Boston Beer Company, or the Craft Brewery Alliance, or another craft brewer, you should expect some increased volatility as this shutdown continues longer.  

There are other very industry specific examples like this, all amounting to possible losses projected to be in the tens of billions of dollars range. For an economy that sells trillions of dollars of products a year, the impact of the government shutdown on the economy as a whole should be muted.

Matt Hylland