As the deadline to fund the government rapidly approaches, Michael Zezas explains what economic effect a possible shutdown could have and whether investors should be concerned.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the market impacts of a potential US government shutdown.
It's Wednesday, February 28th at 2pm in New York.
Here we go again. The big effort in Washington D.C. this week is about avoiding a government shutdown. The deadline to pass funding bills to avoid this outcome is this weekend. And while many investors tell us they’re fatigued thinking about this issue, others still see the headlines and understandably have concerns about what this could mean for financial markets. Here’s our quick take on it, specifically why investors need not view this as a markets’ catalyst. At least not yet.
In the short term, a shutdown is not a major economic catalyst. Our economists have previously estimated that a shutdown shaves only about .05 percentage points off GDP growth per week, and the current shutdown risk would only affect a part of the government. So, it's difficult to say that this shutdown would mean a heck of a lot for the US growth trajectory or perhaps put the Fed on a more dovish path – boosting performance of bonds relative to stocks. A longer-term shutdown could have that kind of impact as the effects of less government money being spent and government employees missing paychecks can compound over time. But shutdowns beyond a few days are uncommon.
Another important distinction for investors is that a government shutdown is not the same as failing to raise the debt ceiling. So, it doesn’t create risk of missed payments on Treasuries. On the latter, the government is legally constrained as to raising money to pay its bills. But in the case of a shutdown, the government can still issue bonds to raise money and repay debt, it just has limited authority to spend money on typical government services.
So then should investors just simply shrug and move on with their business if the government shuts down? Well, it's not quite that simple. The frequency of shutdown risks in recent years underscores the challenge of political polarization in the U.S. That theme continues to drive some important takeaways for investors, particularly when it comes to the upcoming US election. In short, unless one party takes control of both Congress and the White House, there’s little domestic policy change on the horizon that directly impacts investors.
But one party taking control can put some meaningful policies into play. For example, a Republican sweep increases the chances of repealing the inflation reduction act – a challenge to the clean tech sector. It also increases the chances of extending tax cuts, which could benefit small caps and domestic-focused sectors. And it also increases the chances of foreign policies that might interfere with current trends in global trade through the levying of tariffs and rethinking geopolitical alliances. That in turn creates incentive for on and near-shoring…an incremental cost challenge to multinationals.
So, we’ll keep watching and keep you in the loop if our thinking changes.
Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We’d love to hear from you.
U.S. Policy: The Economic Impact of a Government Shutdown
Andrew Sheets: GDP, Inflation and a Possible Government Shutdown
Mike Wilson: A Shift in Stock Personalities
Andrew Sheets: The Rise of Corporate Bond Yields
US Economy: Stronger Growth in the U.S. Economy
Michael Zezas: China’s Evolving Economy
Kickstarting the U.S. Mining Industry
Seth Carpenter: The ECB, The Fed and Oil Prices
Thematic Research: How AI Can Transform Travel Booking
Martijn Rats: Why Energy Sector is Attractive Once Again
U.S Housing: The Impact of Raising Rates
Vishy Tirupattur: U.S. and China on Divergent Paths
Global Economy: Fall Outlook for Rates and the Economy
Andrew Sheets: A Murky Forecast for Equities and High-Yield Bonds
Stephen Byrd: Watch Out for El Niño
Michael Zezas: Congressional Return Raises Questions for Markets
Mike Wilson: Are Stocks Beginning to Question Economic Resiliency?
U.S. Consumer: How U.S. Consumers Are Shopping to Go Back to School
Daniel Blake: Japan’s Surge in GDP Growth
Energy: Are Europe’s Clean Energy Goals Realistic?
Create your
podcast in
minutes
It is Free
The emPOWERed Half Hour
Now, What’s Next?
Access and Opportunity
At Scale: A Sustainability Podcast