Why Wall Street isn’t worried about a government shutdown

From Wall Street’s perspective, the threatened government shutdown makes for good political theater, but really doesn’t mean a lot to the world of stocks and bonds. Investment strategist Fred Dickson says he considers it “a big yawn.”

In large part, this attitude is shaped by the belief that any door-closing in Washington will be only temporary, sort of like an “out to lunch” sign. Past government shutdowns were brief and actually helped the stock market slightly. Traders are more concerned by the looming debt ceiling and the latest earthquake in Japan.

Yes, some 800,000 federal workers will get furloughed. Some tax refund checks might not be in the mail. Some economic reports might be delayed.

But none of that appears to worry stock traders.

“Ideally, any shutdown will be brief – less than 48 hours,” says Doug Roberts, chief market strategist for Channel Capital Research in Shrewsbury, N.J. “Maybe they shut down on Friday and reopen on Monday, then each side declares victory and goes home.”

In fact, the market was mostly flat on Thursday morning – until news came of another major earthquake in Japan. Stocks immediately sank as traders waited to find out more information about the new quake, which measured 7.1. The market rallied around noon, and by 3:00 p.m., the Dow Jones Industrial Average was 12,389, down 37 points from Wednesday's close.

Past shutdowns and the market

In 1995, the last time the government ran out of money, the stock market actually rose 1 percent during the Nov. 14–19 shutdown, points out Mr. Dickson, chief investment strategist at D.A. Davidson & Co., in Lake Oswego, Ore.

Congress and President Clinton then agreed to a short funding extension, but that money ran out on Dec. 16. The two sides did not reach a new agreement until Jan. 6, 1996. Dickson observes the stock market rose 4 percent during the 30 days leading up to the second shutdown and another 1 percent during the actual shutdown.

“I think the political fallout is bigger than the economic fallout,” he says.

Although President Obama has been warning Congress that any government shutdown will hurt real people, Wall Street traders think it probably won’t affect the US economy unless it lasts several weeks.

“I tend to look at it as a big company having a strike,” says Frank Fantozzi, CEO of Planned Financial Services, in Cleveland. “It is no different than if GM shuts its doors.”

A brief shutdown would result in “a little speed bump” unlikely to derail the economy, he says.

The actual difference between the Republicans and Democrats is relatively small, notes John Canally, chief economist at LPL Financial, an investment manager, in Boston, “The Republicans want to cut $70 billion out of this year’s budget and the Democrats $30 billion,” says Mr. Canally. “According to the Congressional Budget Office, we will spend $3.6 trillion, so the difference between the two sides is a rounding error.”

Raising the debt ceiling

Wall Street’s greater concern is raising the debt limit ceiling. Sometime in late May, the government will not able to float any new debt unless Congress gives it the green light to issue more IOUs. Treasury Secretary Tim Geithner has warned Congress that a failure to act on this measure could drag the economy into a steep recession as the US government defaults on outstanding obligations.

“There have been a lot of behind-the-scenes attempts by the administration to educate members about why they have to” raise the debt ceiling, says Pete Davis of Davis Capital Investment Ideas in Washington.

If Congress fails to act on the debt ceiling, Canally thinks Wall Street might remind them with a sharp decline in the stock market. He points out that in 2008, when Congress balked at passing the TARP legislation, the Dow fell 778 points in one day. “They passed the legislation a few days later,” he recalls.

“The bigger issue is the debt ceiling,” Canally says. “The government shutdown is more of a nuisance.”