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Congress reached a deal Monday afternoon to end the brief government shutdown after three days, but the agreement just sets up another possible shutdown next month.
The agreement, approved first by the Senate and later Monday by the House of Representatives, reopens the government and funds all government operations through February 8.
Markets, which had reacted with indifference to the shutdown in Monday’s early trading, were slightly up after the announcement.
How we got here
The government shutdown was the culmination of months of failure by Congress to agree to a budget. The crisis started last September, when the government’s fiscal year began on October 1 without lawmakers agreeing to a budget and the accompanying agency-by-agency appropriations bills. That resulted in Congress passing a series of stopgap funding measures, known as “continuing resolutions,” which are short-term agreements to keep funding the government at the same levels as last year. There have been three of those since September.
The most recent temporary agreement, reached just before the Christmas holiday, expired on January 19. The House of Representatives approved legislation on January 18 that would have extended funding through February 16. The bill also included 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 included 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.
But the narrowly divided Senate rejected the deal late Friday. The Senate stayed in session for much of the weekend, with groups of senators engaged in multi-hour negotiations to resolve the standoff.
When no deal was announced on Sunday evening, Washington was thrown into confusion as tens of thousands of federal employees were told not to come to work Monday morning and government agencies scrambled to put contingency plans into place—only to have the government reopen hours later.
The agreement reached Monday afternoon simply changes the funding date from February 16 to February 8. It retains the CHIP provision and the delay of the health-care-related taxes.
Postponing a difficult battle yet again
Even though Congress reached an agreement, it only postpones a very difficult battle.
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 proved elusive, falling victim to the usual disagreements between the parties over federal spending amounts and how dollars should be allocated. Republicans are calling for an increase in military spending, while Democrats want that paired with a similar increase in non-military spending.
Immigration policy has been perhaps the biggest stumbling block in the negotiations. Democrats refused 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 pressured Republicans for a solution and used the government shutdown as leverage.
But the deal includes neither a longer-term plan for how to resolve the spending impasse nor a specific bipartisan agreement on immigration. It only allows for more time for negotiations on both issues to continue. That sets up the possibility that those talks could fail to produce agreements before the new deadline of February 8, raising the spectre of another shutdown drama early next month.
What it means for markets
Market reaction Monday morning was muted, in keeping with historical precedent. Previous 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 most recent shutdown—the 16-day stalemate in October 2013—actually produced a positive market reaction, with stocks (as measured by the S&P 500® Index) increasing in value by more than 2%.¹
The chart below shows that those gains came mostly in the final days of the 2013 shutdown, likely because investors began to sense that a deal was imminent. The other two most recent shutdowns, in 1995, showed similar results, with the market initially dipping, followed by a rally as the shutdown went on.
The S&P 500 gained ground during previous government shutdowns
Source: Schwab Center for Financial Research, using Bloomberg data. S&P 500 returns do not include dividends or taxes.
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.