It was a photo finish. At the end of September, with just 45 minutes to spare, Congress managed to push through a stopgap spending bill and avoid an imminent government shutdown. Don’t celebrate yet, though, as a shutdown could still happen in November. If that happens, there will be repercussions throughout the U.S. economy and financial markets.
The Sept. 30 bill that President Joe Biden signed was only a temporary measure. It extended the deadline for a full 2024 spending bill by 45 days. So, there could be a crisis coming in mid-November.
Making matters worse, Speaker of the House Kevin McCarthy just got voted out of his position. This event could lead to gridlock in Congress and therefore a high probability of a shutdown. So, what does all of this mean for the financial markets over the coming months?
Could a Government Shutdown in November Be Good for Stocks?
The most obvious conclusion is that a November government shutdown would be bad for large-cap stocks. Or, in the words of Stifel chief Washington policy strategist Brian Gardner, the markets “might react negatively to government dysfunction.”
It’s an easy conclusion to make, as the financial markets often don’t respond favorably to surprises. To quote Greg Valliere, chief U.S. policy strategist at AGF Investments, “We’ve never seen anything like this.”
On the other hand, perhaps we should expect the unexpected on Wall Street. After all, when most stock traders think one thing is going to happen, oftentimes something else happens.
Furthermore, the market is highly efficient and hasn’t priced in a full-on crisis. To quote Sam Stovall, chief investment strategist at CFRA Research:
“Despite the likelihood of a government shutdown, Wall Street has so far just yawned and said, ‘Here’s another example of how Congress can teach Hollywood a thing or two about drama.’”
Thus, the market’s efficiency could allow it to stay resilient throughout this crisis, which may turn out to be a non-crisis. Ryan Detrick, chief market strategist at The Carson Group, suggests that the “market knows this will be resolved and tends to look forward, past the scary headlines.” Consequently, government shutdowns “don’t have to be bearish.”
What You Can Do Now
If you’re still worried about a November government shutdown, you don’t have to divest all of your stock holdings. Instead, you can just cut back but also hold onto some of your highest-conviction stocks.
Alternatively, you can simply allow the ultra-efficient stock market to resolve the situation on its own. America has survived government shutdowns in the past, and as the trading community knows, this crisis will pass as well.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
