What’s happening in global equities?
Stock market graphs can be a classic example of graphs which look impressive but can be very misleading. This is because, at the end of the day (or at the close of trade), stock market graphs are, to a large extent, representations of market sentiment, rather than expressions of fundamental data. A case in point is the U.S. stock market, the graph for which has been dropping sharply downwards over recent times.
The stock market versus the government
To understand the recent behaviour of the stock market, investors need to cast their minds back to the election of President Trump who famously promised to build a wall between the U.S. and Mexico. Over the course of the last year, he has been stepping up pressure on Congress and the Senate to approve funding to build said wall. His key problem is that his Democratic opponents now control Congress and hence are in a position to refuse his request which they are currently doing. Trump however has indicated that he will not back down on this and so there is stalemate. While this situation has been a theoretical possibility for some time, it only really crystallised into a serious possibility when it was confirmed that the Democrats had taken control of Congress, thus setting the stage for a much anticipated (dreaded showdown) which has huge short-term implications for the U.S. economy.
Government employees do not get paid
The first key point to understand about a U.S. government shutdown is that government employees do not get paid, at all, until it is resolved, at which point, with a very few exceptions (e.g. contractors), they typically get paid all pay due to them. This means that unless they have savings, they cannot pay their bills, hence the people who provide goods and services to them have their cash flows disrupted. The second key point to understand about a U.S. government shutdown is that they are not at all “black swan” events. They have happened before (and in recent memory) and they may well happen again. What is rather special about this one is the degree to which both sides appear to be prepared to dig in their heels and refuse to budge, thus creating, rather ironically, the classic Mexican standoff without any end in view. Understandably, this has the power to make investors nervous, hence the stock-market reaction.
What does the shutdown mean in practice?
In practical terms, the shutdown means (hopefully) short-term pain for government employees (who do not get paid) and inconvenience for anyone who either supplies goods and/or services to said employees or who relies on them to provide goods and/or services. In principle, essential services should be maintained as people categorized as essential workers are required to turn up to work even during a shutdown, but in practice they cannot be prevented from calling in sick. From an economic perspective, however, the important point is that workers across other sectors continue to be paid and hence can continue to be economically active as normal. It is also worth noting that the private sector is stepping in to help federal employees with various companies already having stated that they will show flexibility to those impacted and it is reasonable to hope that the federal employees impacted by the shutdown will have savings and/or friends to help them get through it, which will also help to reduce the overall economic impact of the shutdown. While the situation has led to analysts reducing their forecasts for the U.S. economic growth, it should still be noted that the forecasts still predict growth, just at a lower level. The current stock market slide could, therefore, be a great buying opportunity for bold investors.