Will a government shutdown hurt your investments?

Lawmakers on Capitol Hill remain in a virtual stalemate over a budget resolution that would keep the government funded for the remainder of the fiscal year. Should Congress fail to reach an agreement before Oct. 1, the U.S. government will shut down.

If that comes to pass, all “nonessential” government business will come to a halt, with some 4 million federal employees forgoing pay until the shutdown ends. Government services deemed essential, including many related to public safety and mandatory programs such as Medicare, Social Security and Veterans Affairs benefits, will remain in place.

“Sure, sure, but let’s get to the important stuff,” investors among you may be saying. “Is a shutdown likely to have a negative impact on my portfolio?”

“The headline answer is no,” says Ross Mayfield, an investment strategy analyst at Baird.

Here’s why financial experts say not to sweat it.

‘Historically, government shutdowns have not had an impact on markets’

The main reason financial experts aren’t worried about a shutdown is because markets have been there before and emerged unscathed.

Since 1975, there have been 21 government shutdowns, which have lasted 8 days on average. The most recent, which began in late 2018 and stretched into 2019, lasted 34 days.

“If you look back at all those shutdowns and take an average return, [the S&P 500 is] actually positive, 0.1%. Essentially flat,” says Brian Levitt, global market strategist at Invesco. Put simply: “Historically, government shutdowns have not had an impact on markets.”

One reason for investors’ ho hum attitude, says Mayfield, is that they know any economic disruptions are temporary. While government employees may not see paychecks during a shutdown, they receive back pay when things resume. “It just kind of shifts things around in time rather than permanently disrupting the economy,” he says.

Another is that shutdowns tend to be short-lived. “There’s no winner. Both parties get blamed,” says Mayfield. “So they usually get resolved pretty quickly.”

That isn’t to say that markets might not get jumpy if the government goes into a more prolonged shutdown. “Political uncertainty often creates volatility in markets,” says Levitt. After all, credit rating agencies have cited political polarization among lawmakers as reasoning for dinging the U.S. government’s credit rating.

But any major market moves in the coming months will have more to do with economic data than with what politicians are doing, Levitt says.

“These things in Washington tend not to move markets as much as people think,” he says. “What the market is looking at is, ‘will things be better over the next months?’ And what that largely means right now is, ‘Does the inflation picture look better?'”

On that front, no one really knows for sure. But you’d be wise to avoid letting short-term fluctuations in the market mess with your portfolio strategy, Levitt says.

“While unnerving, concerns about shutdowns shouldn’t change investors’ long-term investment plans,” he wrote in a recent note. “This isn’t the first government shutdown, and it’s likely not the last.”

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