Prepare for a Government Shutdown on October 1

It’s not the end of the world, but it could spell the end of the bull market in large-cap stocks. Whenever the U.S. government shuts down, there are ripple effects throughout the economy – and even a “Teflon” market will have trouble shaking off the disruptive impact.

A shutdown of the government typically starts with Congress’s failure to agree on how to fund an array of services. Getting Congress to agree on anything in this divisive environment is practically impossible, as the Democrats currently control a majority in the Senate while Republicans control the House of Representatives.

In other words, a government shutdown is based on disagreements among politicians, not the people who voted for them. Yet, as always, the voters will pay the price for politicians’ irreconcilable differences.

This couldn’t have happened at a worse time. Americans are drowning in debt and collectively owe more than $1 trillion in credit card debt. Even as the Federal Reserve teases the “soft landing” narrative, many Americans can’t afford food and gas, and are just a missing paycheck away from total ruin.

Nevertheless, far away on Capitol Hill, Congress will probably agree only to disagree about how to manage the nation’s ills. Since no funding legislation will probably be enacted by the October 1 deadline, federal agencies will have to stop all “non-essential” work and will not send their workers any paychecks as long as the shutdown lasts.

Some folks might celebrate the defunding of the public sector, but consider that a shutdown could delay the paychecks of military personnel, Transportation Security Administration agents who operate security at airports, and even Postal Service workers who deliver the mail.

Private sectors could be impacted, as well. For example, the U.S. travel sector could lose $140 million per day during a government shutdown. But of course, the president and members of Congress will continue to work and get paid.

Courtesy: NBC News

Unfortunately, a government shutdown only ends if Congress and the president agree on government funding legislation. There’s no time limit on how long a federal government shutdown can last.

This isn’t to suggest that a shutdown would go on for months – but then again, how many people predicted that Russia’s invasion of Ukraine would still be happening 20 months later? Resolutions are quick, but problems can persist for a frustratingly long time.

Plus, we must consider the impact of a government shutdown on the financial markets. Goldman Sachs estimated that a shutdown would reduce economic growth by 0.2% every week it lasts. That might not sound like much, but a few weeks of this could easily tip already fragile large-cap stocks into correction territory.

Turning to the mainstream media for answers, or even sensible commentary, is a waste of time now. Politicians and commentators on both sides of the political aisle are more interested in blaming each other than establishing enough common ground to avert a fiscal cliff in October.

Courtesy: Google Dictionary

Don’t get the wrong idea here. I’m not fond of government spending as a solution to anything. The total U.S. debt is now up $10 trillion since 2020, and the last thing we need is more print-and-spend policy to exacerbate the problem.

It’s during times like this when the voters truly find out what politicians are really made of. Thankfully, America is strong because of its citizens, and the nation will get through this crisis despite the career politicians’ refusal to work together.

But understand first and foremost that a crisis is upon us. The stock market, being as forward-looking as it is, might wobble for a day or two and then rebound before the crisis is over. That’s because short-term traders have been conditioned to buy every dip on the assumption that print-and-spend policy will always save the day.

Really, though, it’s up to us to save ourselves. When governments are intolerably dysfunctional, self-sufficiency and self-education are the only tools that can fix a system that’s clearly broken beyond repair.