Politics took centre stage once again this week when the US government shut down after Democrats and Republicans were unable to reach an agreement on how to keep it funded.
For investors, there is a playbook of sorts here. It is not the first time that the US government has shut down, although it is the first since 2019 – during president Donald Trump’s first term.
The phenomenon has been more common in the past 15 years, however, and so there are comparisons to be made to the past.
Luke Bartholomew, deputy chief economist at Aberdeen, said the longer the shutdown continues, the more the economic drag will build. He suggested around 0.15 percentage points will be knocked off economic growth each week the government remains closed.
But Chris Beauchamp, chief market analyst at IG, noted shutdowns are usually a “non-event for investors”.
It may come as little surprise then that the US market has continued to chug along nicely this week, up 1% over the past five days.
Not all were as sanguine, with Hargreaves Lansdown chief investment strategist Emma Wall noting that shutdowns have historically “been bad for the US dollar, bad for US equities and bad for bonds too”.
“This is an unwelcome event for a market that has been on a tear since the tariff-induced lows of April and had been building positive momentum thanks to the AI [artificial intelligence] boom, a Fed rate cut and a near end to tariff uncertainty,” she said.
The big question will be what this means for the Federal Reserve, experts all agreed. With the government out of action, there will be no release of crucial labour market data this week, something the US central bank is monitoring closely to inform its decision on interest rates.
Most agreed the Fed was likely cut again at its next meeting in October, despite the blip in data. American Century Investments senior client portfolio manager Joyce Huang noted that “the numbers should be released before then, unless the shutdown lasts for several weeks”.
“With or without the shutdown, a rate cut in October still seems likely,” she added. Bartholomew agreed this was the most likely outcome but said the lack of data “certainly won’t make its [the Fed’s] job any easier”.
So does the shutdown matter?
This question was posed by Neil Wilson, UK investor strategist at Saxo Bank, earlier this week. The answer is likely to be – it depends.
The market has continued on its merry way, with the shutdown failing to upset the bull run stocks have been on for the past few months, although he noted that with no nonfarm payrolls there could be a knock-on impact for currency traders and bond markets.
Perhaps the big winner has been gold, which Wall said has been “flashing a warning signal” since the start of the week as it has hit new record highs.
“Gold is up 45% over the past year, buoyed by geopolitical and macroeconomic uncertainty – with investors and global central banks alike stockpiling the asset,” she said.
Premier Miton Investors chief investment officer Neil Birrell added: “With bond markets reacting to extreme government borrowing requirements, credit spreads being tight and equity markets near highs with unforgiving valuations, it is hardly surprising to see investors move to perceived safe-haven assets when a negative event such as a US government shutdown comes to town.”
He suggested “any form of diversification looks appealing” right now, suggesting metals such as gold and silver, cryptocurrencies and perhaps other commodities as well.
Still, at present there is no sign that the latest shutdown will derail markets just yet. But if it lasts as long as it did during Trump’s first term (35 days), investors may need to start paying more attention.