The market has shaken off government shutdowns in the past. Here's what Wall Street expects

Published Fri, Sep 29 20233:01 PM EDTUpdated Sat, Sep 30 202310:01 AM EDT

A government shutdown looming on the horizon could dampen market sentiment to start October even as Wall Street wraps up what's been a challenging month and quarter. Legislators are scrambling to pass spending legislation by the Saturday, Sept. 30, deadline . A failure to reach an agreement by midnight would mean a shutdown commences Sunday, when government funding expires, meaning more than 2 million civilian federal workers would be furloughed or working without pay. Many market participants expect financial markets and the economy will broadly shake off concerns from a shutdown as they have in the past. In notes earlier this month, Wells Fargo pointed out the impact of shutdowns in the past decade were "relatively small and short-lived," while RBC Capital Markets said equity market declines "tended to be rather mild." Still, a shutdown could make its impact felt the longer it lasts in such direct ways as hurting the country's economic growth or delaying the release of traditional government economic data at an inopportune moment for the Federal Reserve. "The question remains duration," said Rob Haworth, senior investment strategist at U.S. Bank. "The market's probably going to set it aside until or unless it starts to have a larger impact on behaviors." On Friday, the major averages wrapped up a losing month and quarter. September was the worst trading month of the year for the S & P 500 and Nasdaq Composite. Economic impact Historically, government shutdowns have been relatively short-lived, though they have been longer and more disruptive recently. The October 2013 shutdown resulted in a 0.3 percentage point hit to gross domestic product in the fourth quarter of that year, according to a note from the Bureau of Economic Analysis. The 2018-2019 shutdown that lasted 35 days, the longest on record, hurt real GDP roughly the same, according to the BEA . To be sure, in both instances, the direct hit to GDP "soon washed out" and rebounded when federal employees returned to work, according to a note from Wells Fargo economist Michael Pugliese. However, he also said the indirect impact of the shutdown is hard to measure. While the shutdown affects government workers, it would also delay payments for government contractors, resulting in a loss in some economic activity the longer it takes to restore operations. What's more, it could hurt consumer sentiment, which could affect markets at a time when volatility has remained low. The CBOE Volatility Index , a measure of volatility, last showed a 17 handle. "I think the most direct impact will be kind of an uncertainty premium being put in the market and that typically means lower price earnings multiples, maybe higher fixed ratios, higher volatility. Maybe some flight to safety, some demand for Treasurys," said U.S. Bank's Haworth. "That's how the market will try and accommodate this uncertainty." Delayed data A shutdown would also come at a most inconvenient time for the Fed, especially as policymakers have said repeatedly they would be taking a data-dependent approach to monetary policy. "If the shutdown lasts for a month or more, the Fed would essentially be flying blind at its November meeting, having learned very little about economic activity and price pressures since the September meeting," Bank of America U.S. economist Aditya Bhave said in a note this month. Crucially, that could mean reports on the jobs market and inflation from the departments of labor and commerce will not be forthcoming until the shutdown is over. In the week ahead, that could affect the jobs report that's supposed to be released Friday, as well as the Job Openings and Labor Turnover Survey data, both reports the Fed would use for insight into the labor market. Instead, traders will have to rely more on private indicators for economic clarity. Even so, Wall Street broadly expects that a government shutdown would be brief, especially as a prolonged shutdown typically damages the party hindering a resolution — a point that's especially crucial ahead of an election year. In fact, some expect there could be an uptick in the market following a prolonged shutdown. RBC Capital Markets said the S & P 500 has rebounded meaningfully after an extended shutdown, gaining 18% to 19% on an average and median basis 12 months afterward. Meanwhile, Jay Woods, chief global strategist at Freedom Capital Markets, expects the government shutdown is "all bark and no bite" when it comes to market reaction. He expects that S & P 500 could bounce as it tests the 4,200 level ahead of a more seasonally strong period for markets. "There's three key technical levels at 4,200, which tells me that this is a good area for people to, one, buy for a trading bounce and two, where this test should hold," Woods said. "I think that this level should be bought, it should be held and we could see a nice bounce from 4,200." The S & P 500 last traded near the 4,300 level on Friday afternoon. Others expect that markets will quickly move on, especially with the Atlanta Fed's GDPNow currently projecting fairly strong third-quarter growth. U.S. Bank's Haworth expects traders will soon move on from the government shutdown, paying more attention instead to the upcoming earnings season. Similarly, Stock Trader's Almanac's Jeff Hirsch expects the government has incentive to reopen soon. "It would slow things down tremendously. It would just be a lot of a lot less money going into the market, less cash flow. And that's negative for stocks," Hirsch said. "But I can't see any reason why anybody who is a politician and is looking to stay in office would want to ruin the economy by keeping the government shut down." "So I expect it to be short-lived and for there to be a compromise, as there always has been," Hirsch added. Week ahead calendar All times ET Monday, Oct. 2 9:45 a.m. Markit PMI Manufacturing final (September) 10 a.m. Construction Spending (August) 10 a.m. ISM Manufacturing (September) Tuesday, Oct. 3 10 a.m. JOLTS Job Openings (August) Earnings: McCormick & Co. Wednesday, Oct. 4 8:15 a.m. ADP Employment Survey (September) 9:45 a.m. PMI Composite final (September) 9:45 a.m. Markit PMI Services final (September) 10 a.m. Durable Orders (August) 10 a.m. Factory Orders (August) 10 a.m. ISM Services PMI (September) Thursday, Oct. 5 8:30 a.m. Continuing Jobless Claims (9/23) 8:30 a.m. Initial Claims (9/30) 8:30 a.m. Trade Balance (August) Earnings: Constellation Brands , Conagra Brands , Lamb Weston Friday, Oct. 6 8:30 a.m. Jobs report (September) 3 p.m. Consumer Credit (August)