Topline
With a potential government shutdown and debt limit showdown both looming in the days and weeks ahead, investors are growing concerned about how uncertainty in Washington could spill over into the market, and though stocks have only posted small returns during past shutdowns, experts agree the United States’ first debt default in history could be much worse—especially for government-exposed stocks.
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Key Facts
In the 14 government shutdowns since 1980, stocks have posted “very small” returns leading up to and during government shutdowns, generating median losses of 0.1% on days the budget authority expires—which would happen Thursday if lawmakers don’t strike a deal—and staying virtually flat throughout the shutdown periods, Goldman Sachs reported in a Tuesday note.
However, the last shutdown in December 2018 was a “notable exception,” the analysts wrote, pointing out concerns over monetary policy helped push the S&P 500 down 2% and noting the underlying environment has historically been “more important” for stock-market performance.
Hardest hit industries have been information technology—including tech giants like Apple, Microsoft and Intel—as well as energy stocks, which tend to outperform during periods of economic growth but fall hard amid market weakness.
Goldman political analyst Jan Hatzius expects lawmakers will authorize a spending measure before Friday to avoid a government shutdown, but he warns the ongoing debt limit showdown is beginning to look as risky as the 2011 debacle that led to credit agency Standard & Poor’s downgrading the nation’s sovereign debt rating and tanked the S&P 500 as much as 13%.
However, it’s not all bad news: Stocks weren’t fazed by the latest debt ceiling showdown in 2013, and they bounced back within weeks in 2011 despite the European debt crisis also plaguing markets.
Tangent
In its Tuesday note, Goldman pointed out companies drawing at least 20% of their revenues from government spending are generally most vulnerable to a debt crisis-induced stock market decline. They identified a basket of 83 such stocks that underperformed the S&P by an average of 1 percentage point during the latest debt limit showdowns, comprising defense firms Lockheed Martin and Northrop Grumman, alongside insurers and healthcare companies like Humana, Anthem, Gilead and CVS Health.
Key Background
With a shutdown deadline less than 48 hours away, lawmakers are still in a bitter standoff over how exactly they’ll pass a measure to fund the government. Senate Republicans voted Monday evening to block a House-passed continuing resolution aimed at keeping the government open through December because it included a provision to suspend the debt limit for another year. Despite voting to suspend the…
Read More: Here’s How Government Shutdowns Have Impacted The Stock Market—And