The messy process of trying to avert a U.S. government shutdown offers investors a glimpse into the challenges the incoming Trump administration will face in implementing its agenda, adding to market concerns for the coming year.
While the showdown has not yet rattled markets, it has fed into the volatility unleashed by the Federal Reserve’s projection on Wednesday for fewer U.S. interest rate cuts next year. The failure to pass a bipartisan deal negotiated with Democrats who now control the Senate and the White House has offered investors a peek at how policy might take shape next year.
The U.S. Congress was scrambling to avert a government shutdown on Friday, hours after more than three dozen Republicans joined Democrats to reject a demand by President-elect Donald Trump to use the spending bill to lift the nation’s debt ceiling. The Republican hardliners who normally are ardent Trump supporters are resisting his push to raise the U.S. debt ceiling, sticking to their belief that government spending needs to be pruned and defying his warnings of revenge.
A prolonged government battle can upset equity investors, who have reaped the market’s roughly 25% gains for the year, its second straight year of 20% or more gains. The fighting may even hurt the so-called “Trump Trade” which has lifted assets likely to benefit from Trump’s policies on tariffs and deregulation.
However, U.S. government shutdowns are fairly recurrent events that on average last nine days. The market generally takes them in stride, with stocks slipping more in the days ahead than during shutdowns, according to CFRA Research data.
The S&P 500 has, on average, fallen 0.3% in the week before government shutdowns, compared with an average rise of 0.1% for the duration the government remained shut, CFRA data showed.
Uncertainty surrounding whether a shutdown will occur is greater than when it actually occurs, said Sam Stovall, chief investment strategist at CFRA. That may be why markets are largely shrugging off the Friday midnight deadline for Congress to get a deal done. (Investors) think it’s more likely than not that it’ll be resolved today, but that a shutdown, if it were to come, would be short and relatively non-impactful, said Helen Given, associate director of trading at Monex USA.
Still, the difficulty of getting a deal to avert government shutdown bodes ill for Trump’s agenda. It’s possible to interpret the current impasse as a sign that Donald Trump will struggle to get a big fiscal stimulus through Congress in 2025, given the resistance of fiscal hawks in his own party who would like to see plans for more spending cuts in exchange for raising the debt limit or extending its suspension.