Key takeaways
A federal budget was finally passed recently, running through September 30, 2024.
Although there were numerous delays and extended deadlines, Congress managed to avoid a government shutdown on the way to a budget agreement.
While budget issues are settled for the federal government’s current fiscal year, Congress will need to take up next year’s budget in only a few months with the goal enacting legislation prior to the November election.
Just prior to yet another deadline, Congress managed to pass the required appropriations bills to finalize federal government funding for the remainder of fiscal year 2024, which runs through September 30, 2024. On March 22, the House passed final appropriations measures, totaling $1.2 trillion to complete the budget process for the fiscal year. The Senate approved those measures on March 23. President Joe Biden signed the budget package that same day.1
“It’s been encouraging for the markets to see a federal government shutdown avoided,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. While no government shutdowns resulted from the prolonged budget approval process that began in earnest the fall of 2023, such shutdowns have occurred on several occasions in the past when Congress failed to reach a budget agreement by a set deadline. The duration of most shutdowns is short, measured in hours or days. Three times in the past 30 years shutdowns lasted multiple weeks.
The political realities of the makeup of Congress added to the difficulties in the recently completed process, according to Kevin MacMillan, head of state and federal government relations at U.S. Bank. “With Republicans having a slender majority in the House of Representatives and Democrats a slim majority in the Senate, there was only a narrow path to the ultimate budget resolution.” Several recent changes in Republican House membership, including resignations, have reduced its already-slim House majority. In the Senate, Democrats have an effective two-seat majority.
While budget issues are settled for the federal government’s current fiscal year, Congress will need to deal with the matter in just a few months. The next budget year begins on October 1, 2024. The process is likely to be increasingly sensitive given that the new fiscal year starts just before the Presidential and Congressional elections in November.
How do the political realities reflected in the current budget process potentially impact the economy and capital markets?
The recent threats of a government shutdown over the annual budget are similar to the debt ceiling struggle that occurred in early 2023. House Republicans held off approving the U.S. Treasury Department’s ability to continue issuing debt to cover the federal government’s bills. However, at the eleventh hour, President Biden and then-House speaker Kevin McCarthy came to an agreement that gained House and Senate approval and allowed the Treasury to continue issuing debt. The debt ceiling deal included budget cuts for nondefense discretionary spending in 2024 and minimal increases for nondefense discretionary spending in 2025. However, House Republicans shifted course and sought to renegotiate the budget.
“With Republicans having a slender majority in the House of Representatives and Democrats a slim majority in the Senate, there was only a narrow path ultimately to get to a final budget resolution,” says Kevin MacMillan, head of state and federal government relations at U.S. Bank.
“A small but vocal group of House members sees the budget process as an opportunity to object to further government funding and pursue other aspects of their political agenda,” says MacMillan. The group led a successful effort to oust McCarthy from his leadership position in 2023.2 Following an extended process to agree on new leadership, Republican support in late October 2023 coalesced behind Rep. Mike Johnson of Louisiana, who was elected as the new Speaker of the House.3 Johnson ultimately helped negotiate final budget deals, with a combination of Republican and Democratic votes.
Federal government shutdowns are not a new phenomenon. Since 1980, the federal government has partially shut down on at least 10 different occasions. Between 1980 and 1986, four shutdowns occurred lasting only one day. Three other shutdowns extended just 3-5 days. Since 1995, however, three government shutdowns occurred that lasted much longer.
Date |
Length of Shutdown (in days) |
|---|---|
|
May 1980 |
1 |
|
November 1981 |
1 |
|
October 1984 |
1 |
|
October 1986 |
1 |
|
October 1990 |
3 |
|
November 1995 |
5 |
|
Dec. 1995/Jan. 1996 |
21 |
|
October 2013 |
16 |
|
January 2018 |
3 |
|
Dec. 2018/Jan. 2019 |
35 |
May 1980
1
November 1981
1
October 1984
1
October 1986
1
October 1990
3
November 1995
5
Dec. 1995/Jan. 1996
21
October 2013
16
January 2018
3
Dec. 2018/Jan. 2019
35
Source: United States Congressional Record.
The biggest concern for investors is the risk of an extended government shutdown. “Although it’s an event that can create short-term hardship for those employees who are furloughed, the long-term impact of past shutdowns hasn’t tended to be broadly significant for the economy,” says Haworth. “Even if there is a temporary decline in economic activity, it hasn’t been a major concern for investors.”
But Haworth also notes that the appearance of dysfunction in the policymaking process may have an impact on how bond rating agencies view the status of U.S. government debt. On August 1, 2023, Fitch Ratings downgraded its Long-Term Foreign-Currency Issuer Default Rating for the U.S., from its long-standing AAA rating to AA+. Among other factors, Fitch cites “repeated debt-limit political standoffs and last-minute resolutions (that) have eroded confidence in fiscal management.”4 More recently, the bond-rating firm Moody’s lowered its outlook on the U.S. credit rating from “stable” to “negative.5 Haworth notes, however, that the potential impact of these downgrades is uncertain. “Even if the U.S. government’s credit rating is downgraded, there’s nowhere else for investors to go to invest in debt securities of higher quality than U.S. government debt.”
Haworth also sees little lasting market risk if a shutdown isn’t avoided. “The history of shutdowns is limited, but the data shows no definitive market reaction to these events, either as the market anticipates it, while the shutdown is underway, or after it is resolved,” says Haworth.
Total return of Standard & Poor’s 500
|
Dates of shutdown |
Duration of shutdown |
Total return 3 months prior to shutdown |
Total return during shutdown |
Total return 3 months after resolution of shutdown |
|---|---|---|---|---|
|
12/16/95 to 1/6/96 |
21 |
6.30% |
0.16% |
6.92% |
|
10/1/13 to 10/16/13 |
16 |
5.24% |
1.66% |
7.90% |
|
12/22/18 to 1/25/19 |
35 |
-17.10% |
10.43% |
10.90% |
Dates of shutdown
12/16/95 to 1/6/96
Duration of shutdown
21
Total return 3 months prior to shutdown
6.30%
Total return during shutdown
0.16%
Total return 3 months after resolution of shutdown
6.92%
Dates of shutdown
10/1/13 to 10/16/13
Duration of shutdown
16
Total return 3 months prior to shutdown
5.24%
Total return during shutdown
1.66%
Total return 3 months after resolution of shutdown
7.90%
Dates of shutdown
12/22/18 to 1/25/19
Duration of shutdown
35
Total return 3 months prior to shutdown
-17.10%
Total return during shutdown
10.43%
Total return 3 months after resolution of shutdown
10.90%
Source: U.S. Bank Asset Management Group.
In all three instances of extended shutdowns, markets managed positive performance during and immediately after the shutdown. In two of the three instances (1995 and 2013), markets performed positively in the months leading up to those shutdowns. In 2018, markets were down prior to the shutdown, but other contributing factors may have been at play, including the Federal Reserve’s decision to hike short-term interest rates during that period.
“A variety of issues impact the markets, even during stressful times like government shutdowns,” says Haworth. “But ultimately, investors are focused on more important fundamental factors such as corporate earnings and market valuations.” Haworth says given the frequency of government shutdown threats, they seem to have a limited impact on the markets. “The market won’t start pricing these in until we actually see a shutdown, and a financial impact from it,” says Haworth.
While political issues such as the debt ceiling dispute, federal government budget impasse as well as the upcoming presidential election cycle can garner significant headlines, it’s important for investors not to allow these issues to distract them from long-term investment objectives.
Talk with a wealth professional to discuss your current portfolio to make sure your assets remain properly positioned to meet your financial goals consistent with your time horizon and risk tolerance.
Government operations are funded by appropriations bills approved by legislative bodies. Those bodies are required to pass budget measures on a regular basis (in the case of the federal government, annually) to provide the needed funding for the government to operate. If policymakers fail to agree to appropriations measures on a timely basis, it can result in a shutdown of government operations. It means, in essence, there is no money available to fund most areas of the government, usually not including essential services like the military or law enforcement. Federal government shutdowns can also occur if Congress fails to extend the U.S. Treasury’s ability to issue debt to cover the government’s bills.
In the case of a federal government shutdown, most of what are considered “non-essential” government functions cease operations. This is because funding is not available to pay employee salaries and cover other expenses of administering functions on a daily basis. What are considered “essential” government services, most related to public safety, such as branches of the military and law enforcement, remain operational. Certain individual government benefits, such as Social Security, Medicare and Supplemental Nutritional Assistance Program benefits, for example, continue to be paid even in a government shutdown.
Since 1980, the federal government has partially shut down on at least 10 different occasions. Between 1980 and 1986, four shutdowns occurred lasting only one day. Three other shutdowns extended just 3-5 days. Since 1995, however, three government shutdowns occurred that lasted much longer. In December 1995 and January 1996, a partial federal government shut down lasted 21 days. In October 2013, a 16-day partial shutdown occurred, and in December 2018 into January 2019, the most recent occurrence, the federal government was partially shutdown for 35 days.
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