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US Stocks Gain Despite Lingering Government Shutdown

US Stocks Gain Despite Lingering Government Shutdown

2019-01-02 21:44:00
Richard Dvorak,

Talking Points:

  • Dow, S&P500 and Nasdaq finish positive after being down 1.5 percent at session lows
  • US politicians to resume congressional session tomorrow with Democrats taking control of House
  • American economic growth could be hindered if government shutdown lingers

US equities finish in positive territory after a choppy session for the first trading day of the new year as bulls and bears wrestle with their sentiment hangover from a dismal end to 2018. Over the last several weeks, investors have been plagued with fear over slowing global growth. This has sparked one of the largest stock selloffs in a decade which may continue with anti-risk sentiment still lingering.

US indices price chart 2019 government shutdown

Highlighted on every trader’s risk radar is the drama in D.C. over the current US government shutdown which looks to extend to its thirteenth day. Ahead of Democrats officially taking majority control of the House tomorrow, congressional leaders met discussing the government shutdown with President Trump today for the first time since the shutdown began on December 22. However, expectations were muted since Democratic leader Nancy Pelosi aims to promptly pass two separate stopgap funding bills when her party takes control of the House tomorrow.

Take a look at IG’s real-time Client Sentiment tracker to see the bullish and bearish biases of traders.

Despite having enough leverage to pass a bill that would reopen the government, Trump’s veto power remains a likely possibility if any legislation comes across the President’s desk without funding for border security. This threat poses the largest risk to an extended government shutdown, especially after considering Trump’s comment last month that he would be “proud” to shut the government down – even for “a very long time.”

While some economists and analysts suggest that government shutdowns should be overlooked by investors as “noise” since the S&P500 average return during a shutdown of -0.6 percent is not as bad as one might initially think. But, diving deeper into the data reveals a strong inverse correlation between the length of a government shutdown and stock market returns. In other words, the longer a government shutdown endures, the worse the performance is for the broader stock market.

As the US government shutdown appears to continue with no current resolution, stocks could continue hemorrhaging if an agreement is not reached quickly. This is especially the case since investors have grown increasingly sensitive over economic growth seeing that a 2014 Congressional report estimates that every week the government is shut down costs the U.S. economy at least 0.1 percent in GDP growth.

--Written by Rich Dvorak, Junior Analyst for DailyFX

--Follow on Twitter @RichDvorakFX

--Check out our Education Center for more information on currency forecast and trading guides.

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