A growing group of analysts and investors is warning that the U.S. government shutdown could soon hurt stocks.
Already confronting an increase in volatility, an uncertain outlook for interest rates and a trade war that threatens to damp global growth, traders now have to factor in the economic effects of the partial closure, in its record 27th day.
“The impact can become meaningful as the shutdown continues,” said Max Gokhman, the head of asset allocation for Pacific Life Fund Advisors. “The longer we go, the more we delve into uncharted waters and, as we all know, this market hates uncertainty.”
There are already some nascent signs of market impact from the shutdown, with an index of airline shares underperforming broader gauges amid concerns that slowdowns in airport screenings will hurt demand for tickets. But pessimists fear the impact could become more widespread as federal workers miss out on paychecks, government bureaucracy slows and the effects trickle out to the broader economy. Terry Haines, Evercore ISI’s head of political analysis, cited research in a note Thursday that found the shutdown could reduce quarterly economic growth anywhere from 0.5 to 2 percentage points.
For all the hand-wringing, the overall market impact has been limited so far. The S&P 500 Index has gained 8.6 percent since the day before the closure. Furthermore, U.S. equities have historically fared well after shutdowns, demonstrating the negative economic impact isn’t usually enough to derail a market rally on its own, according to an LPL Financial Research note Thursday.
“It’s important to recognize, however, that the current shutdown has lasted for an unprecedented amount of time with no end in sight,” the note said.
Analysts are bumping up their estimates for just how long this shutdown will last. There’s a 40 percent chance the political stalemate will extend into February as President Donald Trump and House Speaker Nancy Pelosi show no signs of softening their resolve, according to Haines. He previously predicted it would “very likely” be resolved by the end of January.
“This is incrementally market negative because a longer shutdown could begin both to have real economic impact and to negatively affect market sentiment,” Haines wrote.
The latest sign of potential trouble came in the Labor Department’s most recent jobs data. While filings for unemployment benefits fell to a five-week low, data showed that initial filings by federal employees jumped to 10,454 on an unadjusted basis in the week ended Jan. 5, double the level in the week ended Dec. 29 and 10 times the amount reported in the week ended Dec. 22.
“Every day, I believe, investors begin to get a little more insight into the implications of a partial shutdown,” said Kristina Hooper, the chief global market strategist at Invesco Ltd. “We could see it show up in diminished air travel and a whole host of other areas that may not have even been considered just a few weeks ago as potential victims of the shutdown.”
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