Oh No! What Happens if the Government Shuts Down?

September is providing one more curveball with the US Government heading towards a shutdown. What, exactly, does this mean?

Congressman are in a stalemate over funding the government’s discretionary spending for the next fiscal year. If Congressman cannot pass a funding bill by October 1^st, then the government will shut down. During a government shutdown, non-essential services do not receive funding and workers can be temporarily furloughed.

Since 1975 there have been 21 government shutdowns with the average shutdown lasting 8 days. The most recent shutdown occurred in 2018 where lawmakers disagreed over funding plans for a US- Mexico border wall and lasted 35 days. Will the government shutdown have a major impact on the stock market?

The historical impact of US Government shutdowns on the US Stock market (S&P 500) has been very minimal. A 2022 study by Bloomberg calculated the average return on the US Stock Markets (S&P 500) during the 21 previous government shutdowns to be + 0.1%- essentially flat. 

So, does this mean the government shutdown won’t impact our portfolios? Not necessarily. It is certainly possible a prolonged shutdown could spook the markets. This political uncertainty could create stock market volatility even though historically it has not been the case.

Remember the government shutdown centers around discretionary, or nonessential, spending. Many of you may be asking how will a government shutdown impact me? I will break it down below.

What’s NOT impacted by a government shutdown?

• Social Security- Social security is not impacted as this is deemed mandatory spending. Social security payments are not subject to annual appropriation bills. Benefits verification could be impacted with workers being furloughed.
•  Medicare/ Medicaid- Medicare and Medicaid are also part of the US Government’s mandatory spending. Like social security, their benefits are not impacted by a government shutdown.
• Veteran Affairs- All benefits paid to Veterans continue regardless of a government shutdown
• Emergency and Legal Services- First responders and most health services are not impacted by a government shutdown. The courthouses will also remain open as these are deemed essential.
• Postal Service- the US postal service and mail times are not affected by a government shutdown.
•  IRS- The IRS will remain open. If the government shuts down, you still have to pay your taxes! For those of you that filed an extension on your 2022 taxes, the processing of your tax return may be delayed. 

What may get impacted?

• Travel- In normal circumstances TSA agents and air traffic control are deemed essential workers. However, these workers are not paid during government shutdowns and can be temporarily furloughed. If you have travel plans next few weeks, it may be wise to get to the airport a little earlier.
•  Military- Defense spending comprises 50% of the discretionary budget. Active-duty military members go unpaid during government shutdowns, and receive wages once the government passes a discretionary spending bill.
• National parks and museums- National parks and museums may close as result of the government shutdown.  
• Federally funded health clinics – The only health services that will be impacted are federally funded health clinics that serve low-income individuals.

It’s not out of the ordinary for politicians to make a mess out of this situation, but it is also in their best interest to agree on a deal sooner rather than later considering 2024 is a pivotal election year for both parties. News of a government shutdown will likely dominate the headlines but it is not worth losing sleep over. This too shall pass!