How Can Government Shutdowns Affect Markets?

Potential Government Shutdown and Its Effects on Markets

The risk of a government shutdown in the U.S. has recently caught the attention of investors. Following an incident in Minneapolis, the Democrats’ rejection of the federal budget package has pushed this probability above 75%. Senate Minority Leader Schumer has announced that they will not approve the mentioned bill, further complicating the process.

Market Uncertainty and Gold Prices

As the government shutdown looms, the search for safe havens in the markets is rapidly increasing. Gold has reached a new record, surpassing the $5,000 level for the first time in history. Goldman Sachs has raised its year-end gold forecast to $5,400 per ounce, considering the increased demand and uncertainty. BofA has adjusted its forecast to $6,000, and Jefferies has raised theirs to $6,600.

Historical Data and Stock Market Performance

The negative atmosphere created by a government shutdown contrasts with historical data. Since 1976, U.S. stock markets have generally performed positively during government shutdowns. The S&P 500 index has gained an average of 3.0% during shutdowns, and in the last five shutdowns, it has pleased investors. Notably, all shutdowns during Donald Trump's presidency have been observed to have a positive impact on the stock market.

Opportunities in Various Sectors

The numbers indicate not only the overall stock market performance but also highlight opportunities on a sector basis. During shutdowns since 1995, defense industry stocks have gained an average of 5.2%, attracting investor interest. Additionally, the fact that government contracts are not canceled during shutdowns suggests that the defense and healthcare sectors could benefit positively from this process.

Investor Psychology and Expectations

Despite all these developments, investors view the cessation of legislative activities or a government shutdown not as a sign of collapse but as a temporary situation. The Fed's supportive policies and strong corporate balance sheets may help overcome these adverse processes.