Posted by It seems like every six months we have the threat of a government shutdown. This time I think it will happen on schedule and may possibly be one of the longest in history. For the simple reason that Trump hates Dems and is going to blame the whole thing on them. It’s all about retribution this time around. It’s also another golden opportunity for Trump to reduce the size of the federal workforce. They say that shutdowns have little effect on the stock market, but this time could be different. Trump normally gives us plenty of warning, but as usual the market won’t react until it actually happens.
Most people won’t notice the shutdown because Social Security, Medicare and essential services keep operating. But the layoffs of federal workers, market uncertainty, and economic impact are things to watch. This time the White House Budget Office has directed federal agencies to prepare for the permanent elimination of positions, if they don’t align with the President’s priorities. Another sign of Trump using every available tactic to reform government. Of the last 10 shutdowns, 2 have produced negative GDP quarterly growth. 50 percent of the time the S&P500 has had negative returns during a shutdown. This is usually followed by a 60 percent chance of positive results 3 months after a shutdown.
The longest government shutdown was a 35-day shutdown that occurred from December 22, 2018, to January 25, 2019, during the first Trump administration. With the stock market at an all-time high, there is no doubt that an extended shutdown will have a negative impact on our investment accounts. I sold a couple tech ETFs just to lock in some profits before the big shutdown. But that will do little to cushion the impact of a selloff. In past years, I’ve made similar adjustments and rode out the shutdown. It’s hard to know when they will announce an agreement, which often sparks a minor market rally. If you are lucky enough to invest just before the shutdown ends, you can sometimes catch the post-shutdown gain.
Another cause for concern is the growing stock market valuations. I have seen positive gains in the last six months. I haven’t seen this since 2020-2021 when they launched all the pandemic relief acts to boost the economy. 2023-2024 was a period of two down months and three up months, which is more typical. We are overdue for a down month (or two). All it will take is a little negative news about AI stocks and an extended shutdown. The impact of rising healthcare costs and thousands of people losing Medicaid coverage in the next year also has me worried. This is money that will now have to come out of people’s pockets. Many who are already living paycheck to paycheck will not be able to afford healthcare. Those who do have savings will have to use that money for healthcare instead of on things that could help the economy grow.