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OFFON

Romain
Fournier

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How the shutdown affects markets

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01/02/2019 | 09:01am EDT

Democrats and Republicans have not yet come to an agreement to end the shutdown, which has been paralyzing the federal administrations for weeks and is expected to continue in the new year. How markets will respond to this is anyone’s guess, but it’s always useful to look back, and see what happened during previous shutdowns…

The new Democratic majority in the House of Representatives is scheduled to make its debut on Thursday, January 3. But it is confronted with a big issue: resolving the dispute with Donald Trump over the financing of the wall that he wants to build on the border with Mexico. This dispute has caused the shutdown of a quarter of the federal government since December 22, 2018, freezing the salaries of more than 800,000 civil servants due to a lack of budget.

Until the two parties agree, funding for 25% of federal departments and administrations will remain suspended. However, Democrats and Republicans appear firmly committed to their positions, each rejecting the blame on the other party.

The Republican President is demanding five billion dollars for the construction of a wall to block the entry of illegal immigrants to the border with Mexico. Democrats refuse to finance it, but propose funds for other border security measures.

Potential damages to the economy

If the partial federal government shutdown continues into late January or beyond, it could take a toll on the economy by dampening federal workers’ productivity. It could also affect consumer and business confidence, which is already reeling from the recent stock market selloff.

This situation is, of course, cause for concern, and investors have been watching it closely. But how much this will affect markets is unclear. Financial services company Charles Schwab has released an interesting infographic looking at how government shutdowns have affected the stock market in the past decades. And it’s good news, compared with other events, previous shutdowns haven't led to prolonged downturns:

Source: Bloomberg and Schwab Center for Financial Research, click to enlarge

Romain Fournier
© MarketScreener.com 2019
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