The 27th day of the US government shutdown — already a record-long closure — has added a new worry for investors after one of the most brutal year for equities in a decade.
It’s a relatively new market catalyst and adds to a swathe of other headaches: There’s Fed policy, the US-China trade war, the “leveraged loan” boom, eurozone drama, emerging-market turmoil, volatile oil prices, and even a possibility of a Trump impeachment.
“We’re in unprecedented territory now, because we’ve never had a shutdown this long,” said Ross Yarrow, a director of US equities at broker Robert W. Baird. “It’s difficult to know if this is big in the market, because we don’t know how the sheer amount of federal worker pay checks affect cash flow.”
He continued: “We need to know how much of GDP will be deferred versus how much GDP will be destroyed. There could be a negative multiplier when you suddenly have 800,000 people with reduced purchasing power.”
The shutdown is already causing a litany of economic concerns. JPMorgan CEO Jamie Dimon warned it could lead to zero growth if it drags on. And analysts across Wall Street have been warning of the impact the shutdown could have on the economy and broader markets.
Economists and investors alike had been sounding the alarm on an economic recession through much of late last year, before the shutdown even started.
“The finish to the year has been choppy, and as we set-up to start 2019 the backdrop of a slowing Europe, weakness in China and partial government shutdown in the US have sentiment fading lower,” Jefferies said in a note on Thursday.
While investors have been wary of the red flags flashing from the flattening US Treasury yield curve and possible recessionary signals, the shutdown has the possibility of bringing those fears even closer, according to Jefferies.
“The question now is what impact will be felt from the current partial government shutdown and if that could pull forward the recession that investors have been predicting for much of 2018,” Jefferies said.
Yarrow added the caveat that the China trade war is potentially much worse for the US economy than a prolonged shutdown:
“800,000 people not buying stuff isn’t as bad as 1.4 billion people not buying stuff,” he said.
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