How stocks may react to a potential government shutdown

ANTHONY SAGLIMBENE, CHIEF MARKET STRATEGIST - AMERIPRISE FINANCIAL

Sept. 18, 2023

Labor conditions, inflation, corporate profits and overall consumer/business demand are likely to play the most significant roles in shaping how stocks trade heading into year-end. However, there are two critical developments – if left to metastasize – that could have an outsized impact on the direction of asset prices: The current United Auto Workers (UAW) strike and a potential U.S. government shutdown.

Here’s what you need to know about both: 

United Auto Workers strike

The United Auto Workers (UAW) began a targeted strike against three assembly plants for General Motors, Ford and Stellantis. Automakers and the UAW couldn’t reach a labor agreement before their contract expired on Sept. 14. As a result, more than 12,000 UAW members have crossed the picket lines as of Sept. 18. The current UAW strike departs from its usual form, as the strike against all three domestic automakers simultaneously, instead of striking against one to help form a blueprint for the others, is a new twist this time around. Bottom line: Record profits at automakers over recent years, potential growth in electric vehicles (which don’t require as many UAW members to build) and years of contracts that have seen inflation-adjusted wages/benefits slip have led to more contentious negotiations between the UAW and automakers. Industry experts believe a final deal in the range of a 25% to 30% wage increase and a reduction in temporary workers could help both sides find some common ground. 

The Anderson Economic Group estimates a 10-day UAW strike against all three automakers could cost the U.S. economy $5.6 billion.¹ Four years ago, a UAW strike against GM alone lasted six weeks, led to a production loss of 300,000 vehicles and cost the company $3.6 billion. GlobalData estimates that 450,000 vehicles could be lost in a strike against all three automakers over 30 days, and 1.4 million cars lost in a strike that lasted 100 days. This compares to the roughly 2 million vehicles currently sitting on U.S. dealer lots. And in the background, the ongoing actors/writers’ strike continues. 

Looming possibility of a government shutdown

Without a budget agreement from Congress, a potential government shutdown could also increasingly dampen market sentiment as the Sept. 30 deadline approaches. While markets tend to look past such government dysfunction, a prolonged shutdown could delay key economic releases when the Federal Reserve and investors need the information to make sound decisions on rates/investments.

What events have led to a potential shutdown?

Congress recently returned from a monthlong summer recess and has until the end of the month to pass spending legislation for the next fiscal year, which starts on Oct. 1. The White House has asked leadership within the Senate and House of Representatives to pass a short-term continuing resolution to fund the government temporarily (avoiding a government shutdown) so negotiations can continue over more than a dozen long-term funding bills.²

While leaders in both chambers of Congress have agreed a short-term funding measure at existing levels for the next few months would be the best path forward, each chamber will need to pass such an extension. Following the debt ceiling showdown this summer and the fractured nature of Democratic and Republican priorities, several experts believe a government shutdown at the end of the month could be difficult to avoid.

“Getting a continuing resolution through the House may be easier said than done,” Ameriprise Senior Vice President of Government Affairs Elizabeth Varley says. “While many Republicans already agreed to and voted for the Fiscal Responsibility Act, which established the spending targets for the 2024 fiscal year, a handful of lawmakers continue to voice opposition. A government shutdown of some limited duration is a possibility; discussions regarding a resolution that authorizes spending until mid-December are in the very preliminary stages. If there is no deal by Jan. 1, 2024, an across-the-board cut of 1 percent will take effect, which most lawmakers would like to avoid.”

How will a spending showdown resolve itself this time?

Regardless of how developments play out in Washington over the coming weeks, we believe Congress will eventually resolve the spending showdown, allowing the government to function normally. In our view, this result helps investors look through the spending debates in Washington and stay focused on the fundamental factors that drive stock prices longer-term (i.e., corporate profits and economic growth).

That said, U.S. debt issued/outstanding stands at 95% of GDP today and is expected to reach 181% by 2053, according to the Congressional Budget Office (CBO). Given years of deficit spending at the federal level, we believe legislatures must at some point seriously address debt and spending priorities more holistically to ensure the U.S. remains fiscally sound.

How have stocks reacted to past government shutdowns?

Although markets have a strong history of looking through prior government shutdowns, in previous instances where the U.S. government was shut down for more than a few days, S&P 500 Index returns over the two weeks before and after a shutdown tend to be more volatile, as the table below shows. We suspect investors anticipated a more drawn-out fight in those instances, contributing to sapping stock sentiment. 

Yet, the S&P 500 Index has averaged a nearly +5.0% return three months after a government shutdown going back to 1990. Even when the government was shut down for longer than a few days and stock volatility was more significant, the Index was higher three months later every time.