Shutdown.

2nd October 2013

Ian Copelin, Investment Director comments “The long-running dispute over President Barack Obama’s Affordable Care Act (commonly referred to as Obamacare) has caused a deadlock over the US budget, forcing about 800,000 government workers home.  The Republican-controlled House has passed a spending bill that maintains spending levels but does not provide funding to implement Obamacare, while the Democratic Senate insists that the program be fully funded.

Despite the political arguing, investors have so far stayed calm following the first partial US government shutdown in 17 years.  In fact the US stock market actually ended the first day of the shutdown modestly higher: yesterday the S&P 500 climbed 13.45 points, or 0.80%, to 1,695.00.

So far the markets have been helped by the expectation the shutdown will delay the Federal Reserve’s plan to taper its $85billion monthly bond buying programme, coupled with the fact that since 1977, there have been 17 shutdowns, of which most lasted no more than a couple of days and in the 12 months following a government shutdown the S&P 500 has gained, on average, 11%.

Most market commentators are suggesting that this shutdown is highly likely to be a short-lived event, and if it is, the impact on the US economy won’t be significant:  it has been estimated that it will cost the US economy about $300 million a day in lost output – a small percentage when compared to the country’s $16 trillion economy.

Unfortunately, coincidentally over the next few weeks, we have the negotiations to raise the US debt-ceiling which has to be raised by 17 October or there could be a debt crisis as the US government would default on its debt.

Although the two are different issues (in a shutdown, the government lacks the legal authority to spend money, but in a debt crisis, the government is mandated to spend money, but doesn’t have the legal authority to borrow the money to spend it), the politicians are using the shutdown as leverage for the upcoming debt-ceiling fight to achieve other reforms over tax and entitlement.

Hopefully the markets overwhelming calm in expecting a last-minute resolution of the debt ceiling and the effect of the government shutdown to be minimal is correct as a protracted government shutdown would inflict real pain on an economy in recovery mode (the longest shutdown was 21 days – 16 December 1995 to 5 January 1996), as Mark Zandi, Moody’s chief economist, has stated that without a shutdown, the US economy will grow at an annualised rate of 2.5% in the fourth-quarter, but with a 3 or 4 week government shutdown fourth-quarter growth would be reduced to an annualised rate of just 1.1%.”