Why Should Stock Market Ignore Government Shutdown?

One f my students Matthew Ady asked, “What happens if government shutdown?”  Despairing to come up a smart answer, I replied with one of David Letterman’s monologues, “Don’t worry about it.  During Bush’s era, the government was shut down for 8 years.”   I was further bailed out by the fact that the US stock market, US dollar, and global stock markets have been generally muted since October 1.

Stock market looks at the numbers.  So let’s do some number crunching here.  Based on IHS Inc., it costs $300 million a day for the lost production of the displaced 800,000 federal employees, which is equivalent to 0.69% of US daily economy. Therefore, it estimated that a two-week shutdown will cost 0.027% of the $15.7 trillion economy.

Furthermore, considering that an already 18% stock market return this year, a two-week delay of selected federal service will erase, at the worst estimate, 1/26 of the return, around 0.80%. Just one day before October 1 already took care of that, especially after the 3% increase after Fed indicating no tapering yet.

The stock market learns from its past that prices should not react to nonsense of any kinds, especially the ones from Washington. According to Bloomberg, stock markets actually performed better than average the year after the last 12 government shutdowns since 1976.

The potential impact on stock market, if any, is through the increase of risk premium.  Studies show, while there were no permanent differences in stock returns days around political events, such as government shutdowns, debt limit changes, and elections, the volatility increased significantly.  In other words, risk only turns into real damage if you trade to realize the risk.  As a result, some experts recommend government shutdown a buying opportunity.

In short, government shutdown may be a media event, but definitely not a stock market event.

A post on the Facebook reads, “Government shutdown.  Moving to Canada,” because he worries about that nobody will fly drones to protect us from imminent danger.  Edward Snowden may come home for a couple of weeks to visit the folks because there are no federal agents listening into his phone conversations.  Quoted again from David Lettermen, “The only person left in White House is Forest Whittaker.”

These may sound like bad jokes.  But the real bad joke is that 800 federal employees are out of a job.  The bad joke is that my secretary’s son Shaun, injured during the Iraq War, waiting for the veteran disability pay for the last 7 years, was told that he may have to wait for a few more days until the government reopens. The bad joke is that a few dozen Republican radicals in the House are able to keep John Boehner hostage and blackmail the majority of the country.  The bad joke is that with a 10% of approval rate, the Congress is expected to get away with this, and walk away with “pork” in the end.  Finally, the real joke is on Americans who will have no memory of all these when get to election time.

After all, the stock market shrugs off the Republican’s first 41 attempts to repeal Obamacare, why should it be different the 42nd time?

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s