Greg Womack Explores How Government Shutdowns Can Affect Markets and the Economy

Greg Womack Explores How Government Shutdowns Can Affect Markets and the Economy
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Government shutdowns, while not common, can have significant impacts on both markets and the economy. These impacts can range from minor disruptions to more significant economic slowdowns, depending on the duration and severity of the shutdown. In the United States, government shutdowns typically occur when Congress fails to pass appropriations bills or continuing resolutions to fund federal government operations and agencies. The current situation, with the discretionary spending portion of the fiscal 2024 U.S. budget yet to be approved and temporary spending set to expire in mid-November, has raised concerns about the potential for a government shutdown. Greg Womack, President and principal for Womack Investment Advisers, has witnessed economic boons and downturns in his over thirty years in the financial sector, and he lends his expertise to exploring the ways government shutdowns can affect markets and the economy.

The Immediate Impact on Federal Employees and Essential Services

“When the government shuts down, many federal employees find themselves in a precarious position, not knowing when they will be able to return to work or receive their next paycheck,” explains Womack.

While a 2019 law ensures that federal employees are paid retroactively once the shutdown ends, the uncertainty and financial strain can take a toll on individuals and their families. Essential services, such as air traffic control and law enforcement, continue to operate, but employees may not receive compensation until the shutdown is resolved. This can lead to reduced morale and productivity among federal workers, ultimately impacting the delivery of crucial services.

Social Security, Medicare, and other public benefits continue to be distributed during a government shutdown, as they are authorized by laws that do not require annual approval. 

Notes Womack, “The services offered by Social Security benefit offices and other public agencies may be limited during a shutdown, which can create challenges for individuals relying on these services.” 

This limitation of services can contribute to delays and inefficiencies, further straining the system and potentially leading to longer-term issues.

The Impact on U.S. Stock Markets

The behavior of financial markets during government shutdowns reveals an intriguing, albeit complex, pattern. Krystal Hur from CNN, referencing Strategas Research Partners, highlights that in the 20 instances since 1976 when the U.S. government has halted its operations, the S&P 500 Index has demonstrated a near-equal split in response—diminishing in value in nine occurrences and advancing in ten. This data indicates that while stock markets generally weather the storm of a shutdown, the effects are not uniform across the board.

“Superficial stability belies deeper undercurrents affecting specific economic sectors,” says Womack. 

Companies that are heavily reliant on federal contracts or government spending are poised on uncertain ground during these periods. For instance, defense contractors or IT service providers to federal agencies may face delayed payments and projects, which can hamper their cash flow and earnings projections.

For investors, these nuances are critical. The varied impact of government shutdowns on different sectors underscores the importance of a well-rounded investment strategy. By diversifying portfolios, investors can create a buffer against the volatility caused by government shutdowns. Such a strategy could include spreading investments across various sectors, asset classes, and geographical regions to reduce the risk that a government shutdown in one area could disproportionately affect an investor’s portfolio performance.

The Broader Economic Implications

Government shutdowns can also have broader implications for the economy, particularly if they are prolonged. 

“A government-wide shutdown would directly reduce economic growth, with the effects becoming more pronounced the longer the shutdown lasts,” says Womack. 

According to Goldman Sachs Chief U.S. Political Economist Alec Phillips, a government-wide shutdown could reduce growth by around 0.15 percentage points for each week it lasted, with the impact rising to 0.2 percentage points per week once private sector effects were included. However, it is important to note that the economy tends to rebound quickly once the shutdown is resolved, with growth rising by the same cumulative amount in the quarter following reopening.

While government shutdowns are relatively rare events, their impacts on markets and the economy can be significant, particularly if they are prolonged. Federal employees and essential services are immediately affected, with financial strain and reduced morale among workers. Public benefits and services may also be disrupted, leading to delays and inefficiencies. The impact on U.S. stock markets tends to be limited, though individual sectors and companies may experience more significant fluctuations. Finally, the broader economy can experience a temporary slowdown in growth, though it typically rebounds quickly once the shutdown is resolved. Events like government shutdowns highlight the importance of being prepared and having a financial safety net in place.

About Greg Womack

Greg Womack is the Founder and principal of Womack Investment Advisers, Inc. He founded the financial firm in 2000 and is registered as an investment advisory firm in Oklahoma, Indiana, Illinois, and California. Before starting his finance career, he owned a landscaping business and worked in a number of service positions to hone his skills.



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