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How will a government shutdown affect the market?

In this article:
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Brian Sozzi gives his latest hot take on the effects another government shutdown could have on the stock market as Congress struggles to find common ground in raising the debt ceiling and funding of the government.

Video Transcript

EMILY MCCORMICK: Well, it's time now for some hot takes. Brian, Julie, and I will run through a few stories that we've been watching today. Brian, I'll start with you because I know you've been focused on the debt ceiling debates in Washington and concerns over a government shutdown. The markets, of course, also closely eyeing that debate.

Especially now that legislation to raise the debt limit and avert a shutdown has been left to the Senate, if a shutdown ultimately were to take place, how would the markets be impacted?

BRIAN SOZZI: Well, I had wrote a story on Yahoo Finance, on our home page now. And it really comes from Moody's chief economist Mark Zandi, very well-respected economist. He did a story, or he wrote a research earlier in the week, saying that the market could plunge more than 33% if there is a government shutdown.

So it made me think, well, what is the other side of the coin here? Perhaps there's something more positive for investors to hang their hat on. And I think I found it via our friends over at Goldman Sachs.

They went back and looked at the 14 government shutdowns going back to 1980. And they found that when budget authority expired, the S&P 500 posted a slight median return of, well, down slightly. During shutdown periods, the S&P 500 rose 1/10 of a percent. And when there was a resolution on the debt ceiling or the debt limit, the S&P 500 median return was 3/10 of a percent higher, pretty good.

And all but three times going back to 1980, the S&P 500 generated positive returns during the government shutdown period. So for those concerned about a government shutdown, at least historically speaking, it's maybe not that much reason for concern just yet here. I will note the sectors too within the S&P 500 during shutdowns have also held up pretty well, according to Goldman's research.

The energy sector has tended to fare the worst. That makes sense because if the government does shut down, you're probably using less energy, probably traveling out less. Who knows what would happen? By the same token, interestingly though, consumer discretionary has performed the best.