Here we go again! If we see another US Government shutdown, how will the markets react?

As I slowly digest the countless extra calories I have consumed into my aging body over the Christmas period, I look to the new year and I think of the many challenges the market could face. Some will no doubt be totally unexpected and will come from nowhere, some like the one I am going to talk about has been around before and will no doubt keep on popping up.

This government shutdown threat is nothing new and we have indeed experienced a number of US Government shutdowns, the most recent back in 2013.

We came close at the end of December but at the last-minute Congress agreed to a short-term spending bill to prevent it. But that bill expires on the aforementioned date of January 19^th and this time many believe passing a similar legislation won’t be so easy.

With the Grand Old Party sitting now with a slim majority of 51-49 and having recently passed their tax reform, there is a general consensus that neither party would be willing to compromise on future legislation.

With areas to be addressed such as Children’s Health Insurance Program to POTUS and the Republicans putting forward their next legislative request which could be Trumps much-touted $1 trillion injections into new infrastructure projects, the chances that negotiations will be anything less than heated is very unlikely.

So how will the markets react if indeed we do get another partial shutdown?

Since 1976, we have witnessed 19 separate US Government shutdowns and no matter what the market has always survived and in some cases, it hasn’t even been that bad for markets.

If we look back to the last US Government shutdown in 2013 which took place between the 1^st October to the 17^th, the SP500 opened at the beginning of the shutdown around 1693.52, hitting a low of 1654.88 on the 9th before recovering and rising to 1720.75 before the 17^th.  This was actually a gain of 3.1%.

In fact, according to LPL Research, historically speaking, over the 19 separate shutdowns, the SP500 has only fallen on average by -0.6%, with the worst drop happening in 1979 when Carter was in the Whitehouse when it fell by -4.4%.

But how will the market react this time? Will it show love like it did to Obama’s administration or fear like it did with Carter?

Well, there is a comparison to what happened in 1979 to the current administration. Back in 1979, the Democratic’s had the Presidency and control of the House and the Senate. Now with Trump, a Republican is in the big chair with his apparently big button and GOP controls both the House and the Senate. So what could actually mean to the market? Potentially fear as if the Republicans can’t get their budget through when they control all the main areas of power, what will that say about future policies and their leadership?

If you wind the clock back to November 2016 and the surprise Trump election victory, the market skyrocketed on the back of optimism of the tax reforms and other cash injections that Trump had promised during his campaign.

Since then, there can be no argument that the SP500 has continued its bull run, though despite his boasts the run is little to do with Trump. It did have a minor blip, when it felt a bit of pressure along with stocks and the USD back in March 2017 when Trump failed to pass his healthcare bill. The market then feared that the much talked about tax reform bill may also fall by the wayside. Markets of course soon recovered and the tax reform bill is now a reality as we start with 2018 with SP500 hitting a new all-time high.

So could a partial US Government shutdown potentially stop this bull run or will the market simply ignore it? The outcome no one could possibly be sure of, but at some point, the market must be due for a correction and a shutdown with the GOP in control of both the White House, the Senate and the House would show a lack of leadership and that might be enough to kick start it.

This article is written by James Trescothick, a senior analyst at easyMarkets