Shutdown, Week Two: Markets Sell Off, but For How Long?

Danielle Kurtzleben
October 7, 2013

The stock market started off Monday morning with a swoon, with the Dow Jones Industral Average plummeting nearly 150 points after the opening bell.

The sell-off came after a week in which markets seemed ambivalent about a government shutdown and impending debt ceiling crisis. In the four full trading days since the shutdown began on Oct. 1, the Dow posted two days of gains and has only lost roughly 1 percent of its value. Likewise, the S&P 500 Index has posted two days of gains and has remained virtually unchanged since the shutdown began.

Will markets continue to plummet as the shutdown drags on? Yes, but it won't be continuous, and it may not even start this week, say analysts.

[READ: Republicans and Democrats Won't Negotiate to Stop Shutdown]

"I think that the market as we saw last week is going to remain jumpy from day to day," says Mark Luschini, chief investment strategist for financial services firm Janney Montgomery Scott.

The shutdown will have measurable economic effects: economists have predicted that each week of the partial government shutdown will cost between 0.15 to 0.2 percentage points to GDP growth, a moderate impact but still an unwelcome hit at a time when the economy continues to crawl its way back to recovery. Meanwhile, lawmakers in Washington remain in a stalemate about ending the shutdown and, more importantly, averting default. The Treasury has predicted it will reach the end of its borrowing authority on Oct. 17, after which it will only have $30 billion in cash to pay its obligations. Defaulting, the Treasury has warned, could mean a downturn worse than the Great Recession.

House Speaker John Boehner remains stalwart that the House is "not going to pass a 'clean' debt-limit increase," as he said Sunday on ABC's "This Week." The GOP-controlled House has refused to either allow the shutdown to end or to raise the debt ceiling without concessions on health care reform. Meanwhile, Treasury Secretary Jack Lew has said the Obama administration will not negotiate until Republicans agree to raise the debt ceiling.

[READ: Stocks Dip as Wall Street Expects Government Shutdown]

Despite the fact that both sides are digging in their heels, there may only be "modest market reaction" as this week moves on, writes Brian Gardner, senior vice president of research at investment bank Keefe, Bruyette & Woods, in a note to investors.

That muted reaction may be because Congress has recently gone through a turbulent series of crises, and the economy has always come out relatively unscathed on the other side. The constant threat of lawmakers causing massive economic damage, followed by last-minute resolutions and small economic effects, has in a sense desensitized investors.

[READ: Wall Street Asks: What Shutdown?]

"I think it's probably due to the fact that in the recent past, where we've had the fiscal cliff and the sequestration cuts sort of came and went" without massive economic damage, says Luschini. "While the political brinkmanship of course was on display, ultimately resolution was found before we had a worst-case scenario."

That could mean investors resting easy, at least for now. However, lawmakers may want to get into gear before next week starts.

"If we reach Oct. 14 without a deal and if the market perceives that there will be no deal before the 17th, then we think volatility will significantly increase," writes Gardner.

Yet it may be that plummeting markets are just the incentive lawmakers need to reach agreement and steer the nation away from economic ruin. If that's the case, a stock market in free fall may in a certain, sad sense, be a good thing in the current political climate.

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