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  • Writer's pictureIshfaaq Peerally

Effects of The Government Shutdown on the Economy and Stock Market

We are currently in the longest US Federal Government Shutdown in history with about 800 000 federal workers not working and without pay.

A government shutdown happens if congress fails to pass appropriation bills, that is, bills to fund the federal agencies or the president decides not to sign those bills. In this case, president Donald Trump does not want to sign the bill without a $5.7 Billions budget for a wall on the border with Mexico.

This shutdown is different not only because it is the longest but also because the president said that he will keep government closed for months and years until he gets his wall.

For investors, the federal agencies which affects us the most is the SEC, the Securities Exchange Commision. Right now only 285 out of the 4436 employees are working(without pay) to keep the stock markets running. This will have major effects on IPOs which will be postponed as a result. This year was supposed to be the year of IPOs. Many companies, such as Uber are expected to go public. This will be now delayed and can have negative consequences on investment banks, which do these IPOs.

However, so far the stock market has been going up. The S&P 500 is up by 7.5% since the government shutdown. Does this mean that the shutdown is a good thing for the stock market?

If we look at all the government shutdowns from 1976 to 2013, we will see that the median change on the S&P 500 is 0% and the mean is +0.6%. We can conclude that what's happening in congress doesn't affect the stock market in a particular way. So we should look at all the government shutdowns separately.

In 2011, there was an issue where a government shutdown was narrowly avoided when Congress were refusing to raise the debt ceiling. When the debt ceiling was risen, the US Sovereign Debt was downgraded by the Standard & Poors. This caused a 6.7% drop the next trading day in the stock market.

This time, 800 000 workers are not working. Less people working mean less spending which means less profits for corporate America.

Tourism is also affected since the TSA is working with limited employees and parks are closed.

Wall Street Analysts say that there will be a drop of 0.1% to 0.2% in GDP for every week that the government is not working.

The longer the US Federal Shutdown will be the worst it will be for the economy and for the stock market

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