The U.S. federal government is expected to enter a "shutdown (temporary work stoppage)" for the first time in seven years. Still, judging from past cases that shutdowns have not had a big impact on the stock market, retail investors in overseas stocks are continuing to buy.
The problem is that during a prolonged shutdown, the release of economic indicators such as jobs and inflation could be delayed. With the market expecting the Federal Reserve, the U.S. Central Bank (Fed), to cut the benchmark interest rate in Oct., there are concerns that uncertainty could grow.
According to the Korea Securities Depository (KSD) on the 1st, domestic investors recorded net purchase settlements of $3,184.21 million (about 4.48 trillion won) in U.S. stocks last month. Even during the most recent week when shutdown worries flared (settlement dates Sept. 24–30), a buy-side advantage of $1,175.68 million (about 1.65 trillion won) continued.
The U.S. federal government's fiscal year begins on Oct. 1. If by then neither the budget bill nor a continuing resolution (CR) is passed by Congress, government agencies must close across the board except for essential areas. As the stopgap budget bill that passed the House was voted down in the Senate, it appears a shutdown will start at 1:01 p.m. that day in Korea Standard Time.
Even so, optimism prevails. That is because stock indexes have traced an upward curve after past shutdowns. According to DAOL Investment & Securities, there have been 21 shutdowns since 1976; while the Standard & Poor's (S&P) 500 index tended to be sluggish leading up to a shutdown, it rose an average of 8% six months after the shutdown began.
Kim Kyung-hun, a researcher at DAOL Investment & Securities, said the reason the S&P 500 rose even after shutdowns may be that "there is a perception it is a 'self-inflicted drama' done knowing it will be resolved anyway, and the market may have already priced in the political uncertainty that grows around each debt ceiling negotiation."
However, the fact that the release of economic indicators could be delayed as U.S. government agencies enter a shutdown is a risk factor. According to global investment bank Goldman Sachs, during the shutdown from Dec. 15, 1995, to Jan. 6, 1996, the employment report scheduled for Jan. 4 was released on Jan. 19, two weeks after the shutdown. The consumer price index (CPI) was also pushed from Jan. 12 to Feb. 1.
The same was true during the shutdown from Oct. 1 to 16, 2013. The release timings for the employment report (Oct. 4 → 22) and CPI (Oct. 16 → 30) were both delayed.
If a shutdown occurs that day, the Bureau of Labor Statistics (BLS) September employment report scheduled for the 3rd is also highly likely not to be released. That is because, under the U.S. Department of Labor's shutdown contingency plan, the Bureau of Labor Statistics said it would not issue any economic reports during a shutdown. The CPI due on the 15th could also be pushed back.
The Federal Reserve (Fed) will hold the Federal Open Market Committee (FOMC) from the 28th to the 29th, and if the shutdown is prolonged, it may have to decide monetary policy without confirming the latest jobs and inflation indicators. Based on the Chicago Mercantile Exchange (CME) FedWatch tool, with participants in the federal funds futures market reflecting a 96.7% chance of a rate cut in Oct., that means uncertainty could grow.
Hwang San-hae, a researcher at LS Securities, said, "The statistical correlation between shutdowns and stock market declines is minimal," but noted, "It could inject uncertainty into the current rally, which is grounded in a growth narrative and expectations for a benchmark interest rate cut."