How Would a Government Shut Down Influence the Stock Market?

Brittney Barrett |

The possibility of a government shutdown has been whirling around for months now, but after the initial plans produced by think tanks across the country and considerable bickering over a plan of action, nothing was done. Today, this trend continued as the House Speaker John Boehner announced that the latest discussions with President Barack Obama were unsuccessful in designing a strategy to circumvent a government shutdown. House Republicans have consistently railed against rumors that the government has come to a “target number” of $33 billion in cuts that will help keep the government functioning until the end of September. The party believes this number is not nearly enough and that unless something drastic happens, for instance a stopgap bill that would aim to cut  $10 billion from an estimated $1.2 trillion budget devoted to funding everyday operations of government through Sept. 30. The White House is reportedly opposed to such a bill and has begun advising branches on what do in preparation for a shut down.

The notion of the government just unplugging for a minute and going back on a week from now still seems foreign though it happened 15 years ago. Predicting the reaction of the market, which is generally sensitive to new reports about the daily price of grain and whether six fewer people applied for unemployment benefits, is a little like trying to predict the apocalypse. Whatever happens, it’s not going to be good.

Confidence is among the last things to come back this recession and a full-on government shutdown is going to be detrimental to that, both on a local and global scale. In terms of appearances, this is among the worst things for it. The government needing to shut down in order to handle debt issues will do very little to instill confidence in lenders who will see the U.S. as being incapable of making necessary cuts to repay debts.

Even more than the debt issues, after years of trying to reform other nations to democracy, closing on the basis of being unable to come to new budget agreements as a result of bipartisan squabbling just makes America look slightly ridiculous. The cuts up for debate account for only 1.6% of Federal spending. If a conclusion on how to do that cannot be agreed upon by Friday April, 8, that will mark the bi-partisanship breaking point.

The simultaneous decline in confidence in the government’s ability to function and manage its debt will surely affect investor confidence both within the nation and overseas. This, combined with the fact that April is the month a lot of investors decide to abandon the market before the slow summer months, will likely end in a hit. Commodities will likely be spared, especially Agriculture ETFs and gold, where investors tend to flee in times of trouble.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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Symbol Name Price Change % Volume
ITI Iteris Inc. 3.27 0.00 0.00 18,159

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