Day 17: Stocks and the US Government Shutdown

The partial US government shutdown notched its 17^th day Monday, officially tying 1978’s shutdown as history’s second-longest. It is also currently history’s most bullish shutdown, with a 5.5% S&P 500 return since December 21, the last trading day before the government closed.^[i] And if it lasts until the weekend, it will surpass the 1995 – 1996 shutdown to claim the title of history’s longest. Exhibit 1 has the full leaderboard, in chronological order, and following it are some thoughts on a few shutdown-related news items.

Exhibit 1: US Stock Returns Surrounding Government Shutdowns

Source: Congressional Research Service and FactSet, as of 12/14/2018. *Before 1980, shutdowns were less complete, with some agencies staying open on the presumption Congress didn’t intend for them to close. Reinterpretation of the Antideficiency Act changed that.

Congress Is Now Refunding Your Tax Dollars as Well as Collecting Them

Historically, because the IRS is included in the “non-essential” government operations that mostly close during shutdowns, it hasn’t issued tax refunds when the government is shut. Yet tax returns are still due, leaving quarterly and annual filers alike a bit rankled. The beginning of tax filing season on January 29 therefore looked even more dismal than it usually would—until today, when the Office of Management and Budget (OMB) announced the IRS will still pay refunds after all. They had already planned to begin calling back workers if the government was still shut on the 29^th, so they could still collect revenue, and apparently the White House realized paying refunds isn’t so non-essential from a political standpoint. House Democrats also seemed to realize this, as they were prepping a bill to reopen the IRS when the OMB made its move.

The resumption of refunds, though a small driver, is yet one more reason we don’t expect the shutdown to have a large impact even if it stretches on (and on). To the extent refund checks help support some consumer spending, they will be able to do so. That is a very, very incremental tailwind, but a plus all the same.

Shutdown KOs SEC, DKs IPOs

Or if you prefer words to acronyms, it turns out that because the Securities and Exchange Commission is also shuttered, startups can’t go public presently. That means a prolonged shutdown could bring disappointment for those hoping for splashy initial public offerings from trendy ride-sharing apps, a certain online corkboard or everyone’s favorite hotel disrupter. Some have argued this could have a wider economic impact by locking up capital and preventing newer companies from being able to raise money, but we have our doubts. For one, the economy has grown fine for years—and startups have found funding—despite billions of dollars being locked into these four companies and other long-awaited startups. As for stocks, IPOs generally aren’t a market driver unless there is a ton of them, causing stock supply to surge. Otherwise, they are mostly just trivia. If anything, delaying these gives investors a break from the temptation to chase hyped IPOs.

Keep This in Mind When Employment Data Come Out

Furloughed workers have started filing for unemployment, which is probably a key reason jobless claims rose in 2018’s final week. It wouldn’t surprise us if they ticked higher still as more people lock in some insurance against a long shutdown—and on the outside chance Congress breaks with tradition and doesn’t include back pay in the legislation to reopen the government (in which case, most workers who receive unemployment would give those benefits back). The shutdown could also show up in January’s unemployment report if it lasts long enough. Consider this a pre-emptive, friendly reminder not to get too hung up on the increase if that happens. A politically driven bump in a backward-looking economic indicator doesn’t mean dark times loom for forward-looking stocks.

Speaking of Data

Usually, we wouldn’t get jobless claims, unemployment or any other government-produced data during a shutdown, as all the major statistical agencies are “non-essential” (to the government, not us, we love data). But this time around, while the Census Bureau (international trade, retail sales, durable goods orders) and Bureau of Economic Analysis (GDP, consumer spending) are closed, the Bureau of Labor Statistics is open! So we got December’s Employment Situation Report right on schedule, and the December Consumer Price Index should hit on Friday.

Meanwhile, the Federal Reserve will keep releasing its data, including industrial production and loan growth. Purchasing Managers’ Indexes, which aren’t published by government sources, also remain active—and showed continued growth, albeit at a slower rate, for December. And we won’t be totally in the dark on US trade, since Canada, Mexico, Europe, Japan and other major trading partners will continue reporting their monthly trade with the US. It is a little more time-consuming to round up cross-reads from multiple countries than simply getting the full US total from the Census Bureau, but scattered data beat no data.

So despite the absence of biggies like GDP, investors won’t be totally without data about the US economy’s performance. Besides, stocks are forward-looking. They have already priced in whatever activity the delayed reports would have shown. Data releases are just backward-looking confirmations of what already happened. Stocks can price in economic activity just fine without them.