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Ousting of House Speaker Kevin McCarthy raises chances of government shutdown, Goldman says

The ousting of House Speaker Kevin McCarthy could have ramifications for the stock market.

McCarthy's recent moves helped the government reach a short-term deal that delayed a government shutdown and avoided any potential fallout in stocks. Without him, the path to a deal before the new shutdown deadline in November isn't so clear.

"A leadership vacuum in the House raises the odds of a government shutdown when the current funding extension expires," Goldman Sachs' team of economists led by Jan Hatzius wrote in a research note on Tuesday. "We continue to view a shutdown in Q4 as the base case, likely when funding expires Nov. 17."

Far-right Republicans, who disagreed with concessions McCarthy made to avoid the shutdown before the Oct. 1 deadline, led the revolt. This will make it harder for whoever takes over as speaker to negotiate a deal with the Democrats, per Goldman.

"The next speaker is likely to be under even more pressure to avoid passing another temporary extension — or additional funding for Ukraine — than former Speaker McCarthy had been," Goldman's economics team wrote.

Rep. Kevin McCarthy, R-Calif., speaks to reporters hours after he was ousted as Speaker of the House, Tuesday, Oct. 3, 2023, at the Capitol in Washington. (AP Photo/J. Scott Applewhite)
Rep. Kevin McCarthy, R-Calif., speaks to reporters hours after he was ousted as Speaker of the House, Tuesday, Oct. 3, 2023, at the Capitol in Washington. (AP Photo/J. Scott Applewhite) (ASSOCIATED PRESS)

While Goldman Sachs doesn't believe it's likely that a shutdown would last beyond two or three weeks, economists have warned that it could loom over markets at a time when the economy already has plenty of other challenges.

Oil prices are hovering near 2023 highs. A strike from auto workers is ongoing, the resumption of student loan payments is expected to weigh on consumer wallets, and now a potential government shutdown is back in play. Before the shutdown was averted last week, EY chief economist Greg Daco dubbed the combination of headwinds the "quadruple threat."

Put together, the issues could "significantly weigh on GDP; especially in an economy weighed down by elevated prices and interest rates," Daco wrote in a research note on Sept. 28.

Additionally, if the government were to shut down, the Federal Reserve would be flying blind without key economic data releases, leaving market participants increasingly uncertain of what the Fed may do next with interest rates. This could further rattle a stock market that has already been selling off due to the uncertain path of interest rates.

Government shutdowns have brought markets down in the past. The median decline for stocks leading into the last seven shutdowns that lasted 10 days or more was 10.2%, per RBC Capital Markets strategist Lori Calvasina.

As Calvasina points out, given a sell-off is underway, that median decline would bring the S&P 500 to just above 4,100. That would be a more than 3% decline from where the S&P sat on Wednesday afternoon.

Josh is a reporter for Yahoo Finance.

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