Rested against the wall. How disagreements over US budget will affect markets

Suspending the work of the US government due to uncoordinated budget may lead to a slowdown in the US economy and the transfer of large IPOs

December 22 in the United States happened the so-called shut-down, that is, the suspension of the government because of the inability to agree on a budget. The main reason for political disagreement was the wall, which President Donald Trump considers necessary to erect on the border with Mexico. The US stock index S & P 500 has since added more than 8%, showing a maximum increase in three months. This is a real paradox that investors ignore such a negative event. How does the suspension of government work actually affect the economy and the stock market?

It is worth noting that the shut-down in the United States is not a rare phenomenon. Over the past forty years, this is the nineteenth case of a similar manifestation of a political crisis. The most notable work stoppages of the US government occurred in 1996 (shut-down duration was 21 days) and in 2013 (16 days).

Implications for the economy

The suspension of government work on the US economy did not have a significant impact due to its limited duration. In 1996, the shut-down effect for GDP was minus 0.4 percentage points; in 2013, it was minus 0.1 percentage points. Losses in economic growth are mainly due to lower government non-defense spending. Their share in the structure of US GDP is about 17%, so the freezing of financing from the budget naturally exerts some pressure on the dynamics of the indicator.

This time, the shut-down may pass unnoticed by the dynamics of GDP, because now fewer government agencies are not working than six years earlier. If in 2013, almost 800,000 officials suspended their work, now - about 380,000.

During the shut-down period, a temporary surge in the number of applications for unemployment benefits is possible, but so far this is not happening. If we trace the dynamics of the indicator over the past three weeks, then only once it was higher than investors' expectations by 11,000 units. In 2013, the first week after shut-down, there was a sharp increase in the number of applications - by almost 50,000. But even if such a jump occurs this year, the situation will normalize after the government resumes its work.

By the way, labor market data is one of the few that is published during shut-down. Statistics on the real estate market, trade and orders of goods will not be released until one of the main providers of economic information, the Bureau of Economic Analysis and the United States Census Bureau, resume their work. All this increases the uncertainty for investors and analysts who cannot track the parameters of the American economy in real time.

Uncertainty, which gives rise to the suspension of the government, perhaps, can be regarded as the only serious negative factor. Coupled with other issues that are raised by the Trump administration, such as trade wars and Fed independence, shut-down can be bad for economic agents. Worsening their expectations may ultimately lead to a further slowdown in GDP growth.

Implications for investors

Stock market participants do not show signs of pessimism. In the history of numerous shut-down this has not been observed. In 2013, during the partial suspension of government work, the stock market added only 1.57%, and in 1996 - 1.63%.

Pressure on quotes is possible only for a few days, and with the appearance of the first signals about the normalization of the political situation, all the negative will be quickly recouped. In 2013, the markets adjusted downward two weeks and began to recover a week before the government resumed.

Progress in negotiations between the Trump administration and the Democrats has not yet been observed, but the impressive growth of stock exchanges over the past two weeks suggests that investors do not attach shut-down much importance when making investment decisions.

So, history shows that the impact of the political crisis on the stock market is insignificant, and this situation should not scare potential buyers who are guided by long-term investments. US stock indexes show signs of recovery from the collapse at the end of 2018, so a full-fledged bull market may return in the coming weeks.

Implications for Companies

One of the main problems that the current shut-down for the stock market can create is the likely transfer of initial public offerings (IPOs) by some companies. Such multi-billion dollar giants such as Uber, Lyft and Palantir can postpone their IPOs.

The fact is that the Securities and Exchange Commission (SEC), as a state organization, was also forced to suspend work for an indefinite period. In past shut-down periods, in 1996 and 2013, the SEC was active thanks to the cash in its accounts. This time, however, the department did not have enough money to fully function.

Companies can continue the process of filing the necessary documents, but the SEC will not have time to process them in a timely manner, since the majority of employees are sent on forced leave. For large projects with strong balance sheet positions like Uber and Lyft, an IPO delay does not pose a threat. Only small companies that are in dire need of additional funding for further development and solving other operational problems may suffer. We believe that in January the exit of any company to an IPO is unlikely.

There is a risk that large initial placements may be delayed at a later date. The fact is that IPO is planned on the basis of the financial statements schedule. If the regulator fails to process the financial data of issuers until mid-February, then Uber and Lyft may need to wait for the next fiscal quarter. However, if companies will have to postpone the placement until the recovery period on the stock markets, then it may become even more successful for them than originally expected.