United States shutdown and its impact on the
global stock markets!! What should Indian investors do?
Dear Readers,
Greetings!!
A US government shutdown is a situation in which
the United States (US) federal government cannot operate because Congress has not
passed a budget or a continuing resolution (CR) to keep the government funded.
This can happen when Congress is unable to agree on a budget, or when the
President vetoes a budget bill. Short-term bill is proposed to avoid the
shutdown, as it extends funding for appropriations bills till October 31, while
instituting a 7.8% cut to discretionary funding. There have been 14
government shutdowns since 1981.
(Source: https://coopwb.in/info/will-there-be-a-government-shutdown-in-october-2023/)
When the government shuts down, non-essential
government services are suspended and employees are sacked (temporarily laid
off without pay). Essential services, such as the military, the police, and
fire departments, remain in operation.
Government shutdowns can have a negative impact
on the stock market. Investors may sell stocks out of uncertainty about the
economy and the government's ability to function. Shutdowns can also delay or
disrupt government economic data releases, which can make it difficult for
investors to make informed decisions.
However, the impact of government shutdowns on
the stock market is typically short-term. In most cases, the stock market has
recovered from shutdowns within a few weeks or months. For example, during the
35-day government shutdown in 2018-2019, the S&P 500 index fell by about
5%, but it had fully recovered by the end of the year.
Kevin McCarthy, the Republican Speaker of the House, plays a vital role in this situation. He is a key
player, navigating internal pressures and aiming to prevent a shutdown.
The following are some of the potential effects
of a US government shutdown on the stock market:
Increased volatility: Investors may sell
stocks out of uncertainty about the economy and the government's ability to
function, which can lead to increased volatility in the stock market.
Lower stock prices: Some investors may sell
stocks at a discount in order to raise cash, which could lead to lower stock
prices.
Reduced liquidity: Trading volume may
decline during a government shutdown, as investors become more cautious.
Reduced consumer confidence: Shutdowns can
create uncertainty and anxiety among consumers, which can lead to a decrease in
spending. This can have a negative impact on corporate profits and stock
prices.
Delayed economic data: Many government
agencies are responsible for collecting and publishing important economic data,
such as GDP growth, unemployment rates, and consumer prices. If these agencies
are closed, investors will have less information to make informed investment
decisions. This can lead to increased volatility in the stock market.
Reduced government spending: Shutdowns can
lead to a decrease in government spending, which can have a negative impact on
the economy. This can also lead to a decrease in demand for goods and services,
which can hurt corporate profits and stock prices.
Historically,
government shutdowns have had a relatively modest impact on the stock market.
However, the severity of the impact can vary depending on the length of the
shutdown and the specific agencies that are closed. For example, a shutdown
that affects the Securities and Exchange Commission (SEC) could have a more
significant impact on the stock market than a shutdown that affects the
National Park Service.
Investors
should be aware of the potential risks posed by government shutdowns and
monitor the situation closely. If a shutdown does occur, investors may want to
consider reducing their risk exposure by selling some stocks or investing in
more defensive assets, such as bonds.
Overall, the effects of a US government shutdown
on the stock market are typically short-term. However, investors should be
aware of the potential risks and take steps to protect their portfolios.
What might happen to the Indian stock market due
to US Shutdown?
The impact of a US government shutdown on Indian
stocks is typically short-term and modest. This is because the Indian economy
is less integrated with the US economy than many other economies. However, a US
shutdown can still have a negative impact on Indian stocks through the
following channels:
Reduced risk appetite: Global investors may
become more risk-averse during a US shutdown, which can lead to a sell-off of
Indian stocks.
Weaker rupee: A US shutdown can lead to a
decline in the value of the rupee against the US dollar. This can make Indian
exports more competitive and imports expensive, which can hurt corporate profits.
Weaker global growth: A US shutdown can
have a negative impact on global economic growth, which can also hurt Indian
stocks.
In addition, a US shutdown can also have a
negative impact on Indian stocks if it disrupts the flow of foreign investment
into India.
However, it is important to note that the Indian
stock market has shown resilience to US shutdowns in the past. For example, the
Indian stock market fell by only 1.5% on the day of the 2018 US shutdown, and
it recovered its losses within a few days.
Overall, the impact of a US government shutdown
on Indian stocks is typically short-term and modest. However, investors should
monitor the situation closely and be prepared to take action if necessary.
Here are some tips for Indian stock market
investors during a US shutdown:
Stay calm and avoid panic selling.
Monitor the situation closely and be prepared to
adjust your portfolio as needed.
Consider investing in more defensive stocks,
such as consumer staples and healthcare stocks.
Review your risk tolerance and make sure your
portfolio is aligned with it.
Hope you
liked reading this article!! Thank you for your time.
Best wishes,
Dr Shashank M Hiremath,
Associate Professor & Placement Advisor (Finance),
JAIN (Deemed-to-be
University), Faculty of Management Studies,
CMS Business School, No.17, Sheshadri Road, Opp
Race Course Rd,
Gandhi
Nagar, Bengaluru - 560 009, Karnataka, India.
W: bschool.cms.ac.in
'An MBA is a financial investment in yourself'
