A shutdown occurs when Congress does not meet a deadline to pass appropriations bills to fund discretionary spending programs that must be approved by Congress as part of the annual budget process. Examples of discretionary spending include funding for the National Park Service and many federal education and transportation programs.
The shutdown does not affect immediately critical government functions such as Social Security benefits, air traffic controllers, and the postal service.
When Congress can’t agree on appropriations bills, it may pass what is known as a continuing resolution that essentially instructs the government to extend the previous appropriations bill. The most recent continuing resolution has expired, prompting the current shutdown. We’ve been here before; since 1976, the government has shut down 18 times. The most recent, in 2013, lasted 16 days.
What a shutdown means to investors
The length of the shutdown is the main concern for the markets. Some estimates, based on the 2013 shutdown, put the cost around $500 million in lost production and economic activity per week, based on GDP.
The markets might experience heightened volatility in response to the uncertainty in Washington. “It is not uncommon for events such as this to unsettle markets in the near term, creating more volatility as we await a resolution,” said Roger Aliaga-Diaz, Vanguard’s chief economist for the Americas.
It is unclear whether the shutdown could trigger the market correction—more prolonged volatility than what could be seen in the next few days or weeks—that has been expected for some time. “The strong fundamentals of the U.S. economy, as well as the momentum in global markets, may counteract a market correction. Higher volatility during this impasse is likely but shouldn’t affect long-term portfolio outcomes,” Mr. Aliaga-Diaz said.
Although returns may be lower for both stocks and bonds in the short-term, investors who remain disciplined, diversified, and patient should be rewarded with fair inflation-adjusted returns.
“Vanguard’s five- and 10-year asset-return expectations are mostly unaffected by potential short-term market responses to this situation,” Mr. Aliaga-Diaz said. “In particular, investors with globally diversified portfolios may be able to better withstand this period of uncertainty in the U.S. markets.”
All investing is subject to risk, including possible loss of principal.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.