Many observers are concerned about the negative impact the possible US government shutdown would have on stock markets. As an investor, it’s important to take a step back and consider the real potential effects. A shutdown adds more uncertainty to the market and while the financial impact is not large, the psychological impact will likely keep the markets on edge. At issue is what the next two years of divided government will look like and whether it will be functional. Perhaps most important in our view is whether the government can efficiently handle any future crisis.
To avoid a full government shutdown, Senate Majority Leader Mitch McConnell said he will push ahead with a continuing resolution—a House-passed stopgap spending bill that is to include money for border security. The resolution would give Congress until February 8 to pass a final spending bill. However, this resolution might not pass. And while one hopes that Congress and the White House will ultimately come to terms, there is a risk that they will not reach an agreement.
Even a partial shutdown could be negative for stock markets in terms of investor sentiment. We believe a shutdown would have limited actual impact on the economy, as Congress and the president have approved more than 75% of the proposed $1.24 trillion budget for fiscal 2019. However, a shutdown can delay the passage of various tax provisions, which may affect certain sectors in the near term.
Despite recent market volatility, US consumer sentiment is still upbeat: The University of Michigan’s Consumer Sentiment index was at 98.3 in December, making the 2018 average the highest level since 2000. Only 12% of the Michigan sentiment survey respondents reported falling stock prices as a primary concern. Tariffs were mentioned by around 25% of consumers surveyed, below the November survey’s figure.
We will await a productive resolution. While we hope Congress and the White House will reach an agreement, there is always a risk the two may not agree on terms and may not be able to gain consensus. We believe active management can help investors navigate through turbulent times associated with uncertainty.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
This information is intended for US residents only.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
To get insights from Franklin Templeton Investments delivered to your inbox, subscribe to the Beyond Bulls & Bears blog.
What Are the Risks?
All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.