Martin Lefebvre, COI & Strategist
Where we go from here remains to be seen. The risks out of Washington will most likely continue to dominate the headlines. President Trump is already clear on his intention to leverage a potential government shutdown in the debt ceiling and spending deadline debate, set to start when Congress returns from recess on September 5th. To avoid a government shutdown, Congress will have to approve an extension of the debt ceiling before September 29, and a spending bill by September 30. The focus will likely be on the latter as Congress will have to discuss highly contentious immigration, healthcare and fiscal policies. With very little support for the border wall, inner fights within the GOP, and Trump’s incentives to please his declining base, we find it hard to believe that the Hill will manage to pass a bill that captures the required 218 votes, on time and without a hitch. Moreover, despite a Republican-controlled White House and Congress, Democratic votes will be necessary and are likely to come with their own demands.
Nevertheless, Republican leaders have little to gain from failing to reach an agreement. With Hurricane Harvey refusing to let up, there’s a growing probability that Congress will pass a debt ceiling increase and a short-term continuing resolution, together with an emergency relief package to help the people of Texas. Not only would that option extend the budget deadline through to approximately mid-December, but it would also give Republicans a window to focus on tax reform, something that they’ve been quite vocal about lately.
Two main conclusions can be drawn from previous government shutdowns. First, they’re usually quite short (median of 3 days since 1981), although recent shutdowns have lasted longer (16 days in 2013). Second, the impact on equity markets has been fairly limited and inconsistent. However, an increase in volatility would be expected in such a scenario (chart 3 and 4). Effects on the economy would also be marginal, coming in the form of reduced work hours for the federal employees concerned (40% of the government workforce, or approximately 800k jobs). This number usually quickly shrinks down as executive branch departments gradually receive their annual appropriations. Elevated valuations and an aging bull market certainly make it more vulnerable to corrections, but our focus remains on the macro backdrop, which continues to favor equities.
** I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by the Research Department of National Bank Financial **