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Congress Scrambling to Avert Government Shutdown

The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

Lawmakers were scrambling on Thursday to approve an extension of government funding to avert a government shutdown this weekend.

The current agreement to fund government operations, reached in December, expires at midnight on January 19. A government shutdown would begin on January 20 if no deal is reached to extend the funding.

The House of Representatives was moving forward Thursday with legislation that would extend funding through February 23. The bill also includes a six-year extension of the Children’s Health Insurance Program (CHIP), a top priority for Democrats. Republicans hoped that adding the popular program to the package would attract votes from Democrats.

The bill also includes two “sweeteners” for Republicans by extending the ban on certain taxes associated with the Affordable Care Act. The deal includes a two-year delay (through 2019) of the so-called “Cadillac tax” on high-cost employer health care plans and a two-year extension (through 2021) of the existing moratorium on the taxation of medical devices.

House Republican leaders were confident they could pass the measure late Thursday, although the vote could be close.

Tougher fight looming in the Senate

The issue could be more complicated in the Senate, where Republicans hold a narrow 51-49 majority. The math became harder when three Republicans—Senators Lindsey Graham (R-S.C.), Rand Paul (R-Ky.) and Mike Rounds (R-S.D.)—announced Thursday that they would oppose the measure in its current form.

With Senator John McCain (R-Ariz.) unavailable because he is receiving cancer treatments at home in Arizona and 60 votes needed to achieve a supermajority that can overcome a filibuster, Republicans could need more than a dozen Democrats to vote for the funding extension in the Senate. As of Thursday afternoon, not a single Democrat had announced that he or she would support the bill in the Senate.

Republicans leaders, however, remained optimistic, arguing that once the measure actually came to a vote, the six-year extension of CHIP would be too tempting for Democrats to oppose.

Still, some Republicans are floating a back-up plan for a five-day extension of funding with no other issues attached to it, to allow time for additional negotiations. That plan has yet to gain any momentum.

Nerves are frayed enough in Washington that agencies began announcing Thursday their operating plans if there is a shutdown. The Smithsonian Institution, for example, announced that its Washington-area museums would be open through the weekend but would close on Monday and thereafter if there is a government shutdown. The popular museums became a symbol of the last government shutdown, a 16-day standoff in October 2013. Both parties used images of devastated families outside the locked gates of popular Washington tourist attractions to illustrate the impact of the shutdown.

Postponing—yet again—a difficult fight

If approved, the four-week extension only postpones a very difficult battle. A longer-term deal will have to be reached before February 23.

The problem stems from the failure of Congress to approve a 2018 budget before the fiscal year began on October 1. That forced Congress into approving what has become a series of temporary extensions of funding while negotiations for a larger deal continue in fits and starts.

Republicans have been pushing for a two-year agreement that will outline the spending parameters for the rest of this year plus all of the 2019 fiscal year, which begins October 1, 2018. But such a deal has proven elusive, falling victim to the usual disagreements between the parties over federal spending amounts and how dollars should be allocated. Republicans are pushing for an increase in military spending, while Democrats want that paired with a similar increase in non-military spending.

Immigration policy is also a major stumbling block in the negotiations. Democrats are saying they will refuse to support any government funding extension that does not include a solution for the immigration status of the so-called “Dreamers.” Last fall, President Donald Trump announced that he would end the Deferred Action for Childhood Arrivals (DACA) program, which protects young undocumented immigrants who are in school or the military, on March 5 if Congress does not pass broader immigration reforms. With that deadline now just weeks away, Democrats are pressuring Republicans for a solution and using the potential of a government shutdown as leverage.

As a result, odds of a government shutdown are higher than they have been at any time since 2013. But a resolution could still come together. It is not unusual for Congress to find a path forward in the final hours.

Potential market impact of a shutdown

Even if negotiations break down and a government shutdown does occur this weekend, Schwab is not anticipating a huge market reaction.

Historically, government shutdowns have not produced significant market volatility. There have been 17 shutdowns of at least one day since 1976, and the average market reaction has been less than 1% to the negative.¹

In fact, the October 2013 government shutdown actually produced a positive market reaction, with stocks increasing in value by more than 2%.¹

Still, the situation adds a potential element of uncertainty to the market’s booming start to 2018. Investors would be smart to keep an eye on the issue, but not let the day-to-day political news trigger any over-reactive changes to portfolios. Your financial advisor can always provide additional perspective about whether a government shutdown might affect your own portfolio.

¹ Based on a survey of the change in the S&P 500® Index during each of 17 shutdowns dating back to 1976. Source: Schwab Center for Financial Research.

What you can do next

  • If you’ve built a solid financial plan and a well-diversified portfolio, it’s best to ignore the political noise and focus on your long-term goals. Want to talk about your portfolio? Call Schwab at 800-355-2162, visit a branch or find a consultant.

  • Explore Schwab’s views on additional policy issues in Washington Watch.
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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Investing involves risk including loss of principal.

Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

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