Government Shutdown Looms: What You Need To Know

U.S. stocks were battered Thursday as the chance of a partial government shutdown increased.

If the worst-case scenario occurs, how will it affect the markets? And how about the economy?

What’s Going On?

Congress has so far passed three-fourths of the bills authorizing spending on government; different agencies are funded by different bills. If lawmakers can’t agree — and obtain President Donald Trump's signature on — legislation funding the rest by this weekend, about 25 percent of the government will run out of money and begin to shut down. 

Nonessential employees in those agencies won’t be allowed to go to work. Some essential employees will work, but won’t be paid. If the matter isn't resolved, more than 800,000 federal workers will be off work or working without pay. 

This has occurred nearly 20 times over the last few decades. The last shutdown, at the beginning of 2018, lasted two days. In 2013, the government was shut down for 16 days, which Standard & Poor’s said cost the economy $24 billion.

Agencies that are already funded, such as the Department of Defense, won’t be affected if lawmakers and the president can’t agree. But other agencies, including the Securities and Exchange Commission, would close, with all but essential employees furloughed.

What’s The Dispute?

Trump wants money for a wall along the Mexico border. The House of Representatives passed a spending measure Thursday night, 217-185, that includes $5-billion-plus for Trump's wall, according to NBC News.

The bill faces a potential filibuster by Senate Democrats, a move Trump is encouraging Senate Republicans to override with the so-called "nuclear option," NBC said.

Meanwhile, the Senate passed a stopgap measure that would keep government agencies going through Feb. 8, but Trump said Thursday he’ll veto the bill.

Effect On Markets

The market volatility this week was widely blamed on the shutdown threat.

"What we don’t know is how long a funding stalemate could last, leaving open the question of the economic fallout,” said Bankrate.com Senior Economic Analyst Mark Hamrick.

But Hamrick said it’s not necessarily the details that send shivers through markets, but the lack of confidence the impasse creates.

“Even if it’s relatively brief, affecting a smaller portion of the government than in the past, it is another example of crippling Washington dysfunction,” Hamrick said. "If lawmakers repeatedly fail on the simple things like funding the government, what confidence can we have that elected leaders can resolve complex issues, like the rising federal debt and climate change?"

Market volatility has accompanied past shutdowns, but they haven’t shown much long-term impact.

Dorfman Value Investments Chairman John Dorfman said in his syndicated column this week that stocks had above-average returns during past shutdowns, and the market went up about half the time during previous closures and down about half the time.

TD Ameritrade Chief Market Strategist JJ Kinahan told Benzinga a government shutdown isn't terribly consequential.

"No. 1 is tariffs. At the end of the day, the government is going to settle this — they have to. The whole thing is tariffs."

Kinahan said he expects volatility to continue until companies have a definitive answer on tariffs.

What About Market Regulation?

“We are currently making preparations for a potential shutdown with a focus on the market integrity and investor protection components of our mission,” the Securities and Exchange commission said on its website.

All but about 300 of the agency’s 4,400-plus employees would be furloughed, with only those in critical law enforcement or roles in which they “protect life or property” continuing to work.

The Commission’s EDGAR online filing system would continue to operate, as it is operated by a contractor, according to the SEC’s contingency plan.

SEC offices that process filings “will be unable to process filings, provide interpretive advice, issue no-action letters or conduct any other normal division and office activities,” the SEC said. “As a result, new or pending registration statements or applications for exemptive relief will not be processed regardless of the status of any review of those filings.”

Related Links:

Trump, Pelosi, Schumer Bicker In Meeting About Wall Funding, Government Shutdown

US Government Shutdowns. What's the Deal?