Looming Threat of Government Shutdown Threatens a Stock Market Crash 2017
Will the stock market crash if the U.S. government shuts down in 2017? It could happen, depending on how fast a resolution comes to pass. This isn’t like past government funding showdowns, which saw much jawboning, but little disruption. There was no alpha male in the White House willing to go to the brink, and the two parties’ funding priorities are more polarized than ever. A stock market crash 2017 could be the end result.
It seems like an eternity that Donald Trump has been president, even though April 29, 2017 marks only Trump’s 100th day in office. The amount of political squabbling that has been circling the news cycle has been breathtaking, to say the least. Unfortunately, none of these squabbles have been resolved, and some threaten to torpedo a government funding agreement altogether. This is the type of uncertainty that Wall Street loathes, because no one knows what surprises are lurking around the corner.
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This is doubly true since we have a self-proclaimed “outsider” as the final arbiter of any agreement. President Trump has already signaled a willingness to force a U.S. government shutdown if certain U.S. government fundings aren’t met, such as the building of a border wall. With the unpredictability that has engulfed Trump’s decision-making processes so far, are the Republicans and Democrats prepared to call his bluff? It’s not assured but, then again, many Trump opponents are looking to add another failure onto his early presidential resume.
This would be quite damaging, considering the embarrassing trouncing that the Republicans took in mid-March, when the American Health Care Act (AHCA) fell through. Making matters worse, it was pulled before a ratifying vote could take place in the House, even though Republicans hold a 43-member advantage. Democrats and liberal Republicans would love nothing more than to deal Trump another shocking defeat, this time using the high-profile U.S. government shutdown to smash people’s remaining confidence in the administration. Yes, some Trump opponents still cling to impeachment hopes, and nothing would bring that closer than a failure to keep the federal government operating.
Trump knows there’s near-unanimity among Democrats to oppose any bill that budgets for a border wall. Since passing a new Continuing Resolution would require 60 votes in the Senate, at least some Democratic support is needed. But there’s little sign that Trump will back away from his biggest campaign promise. It’s the biggest game of chicken in America right now, except both sides may actually choose to collide for their own reasons.
So why does all this matter anyway? If there is a government shutdown, won’t all essential services still run and won’t all of America’s creditors be paid? True, there will be no anarchy, nor defaults. Citizens might have to plan alternatives to camping in some federal parks, but this is small potatoes. The problem occurs if Trump strikes out again on a major legislative item, souring confidence in his administration. The epic stock market reflation trade is at stake, and so are the highly expected corporate tax cuts that are fueling the rally.
There is also the very real risk of economic slowdown, which the economy needs like a hole in the head.
Citigroup Inc (NYSE:C) has made some very pertinent points on the subject. Citigroup estimated that, in 2013, when the government shut down for 16 days during the last impasse, fourth-quarter gross domestic product (GDP) was reduced by an estimated 0.2 and 0.6 percentage points. Moreover, 120,000 fewer private-sector jobs were created during the first two weeks of October. (Source: “What Happens If The Government Shuts Down,” Zero Hedge, April 24, 2017.)
What happens if targeted brinkmanship occurs on either side of the aisle, leading to a more protracted shutdown? Could the next stock market crash take place if the government shutdown spirals out of control, with either side refusing to budge? Not only are the Democrats universally opposed to everything Trump will propose from here on out, there are numerous Tea Partiers and Republican fiscal hawks in both legislative branches willing to take a stand against Trump.
It will require very delicate maneuvering to move through this quagmire unscathed. A stock market crash 2017 could hang in the balance.
Why Upcoming Threat of Government Shutdown Could Cause Stock Market Crash in 2017
As I mentioned earlier, there is a quantifiable impact on earnings during a government shutdown. After all, “Uncle Sam” is, by far, the largest driver of economic activity in the United States. In fact, Uncle Sam accounts for approximately 36% of all GDP in the Unites States, or over one-third of the entire economy! Think of all the outlay subsidies it supports, from Electronic Benefit Transfer (EBT) cards, to social security, to everything in between. Some “non-essential” programs will get hit, as will the hundreds of thousands of temporarily laid off workers not spending earnings in their local economies.
While the market usually shrugs off “temporary” impairments, we can’t discount an upcoming stock market crash from rogue algorithms gone mad. Not only will already-falling earnings expectations come under fire from a government shutdown, the information spigot that drives the stock market.
That’s because during a government shutdown, federal data collection becomes affected. Major market-moving economic reports will be delayed, possibly leading to a lack of confidence in the market direction on Wall Street. In such a tightly-wound market where everything is correlated, the wrong headline could send the broad market careening.
For example, analysis done to determine the cause of the August 24, 2015 flash crash found that price-insensitive programs might cause repeated sell-offs. This sent the Dow Jones Industrial Average (DJIA) careening 1,100 points in the first five minutes of trade, which exemplifies the devastation that can occur when tightly correlated markets freak out. (Source: “What happened during the Aug 24 ‘flash crash’,” CNBC, September 25, 2015.)
The impending government shutdown comes at a time when all major markets are at—or are hitting—all-time highs. Valuations are stretched beyond belief, with the S&P 500 trading at an astounding 26.5 times earnings, the third-highest valuation in history. The markets continue to levitate on assumptions that growth will pick up, but a government shutdown will make this prospect less likely. For the stock market to move higher, investors will need to see that President Trump’s pro-growth, pro-business economic policies are going to get passed.
To understand the gravity of market expectations, consider how much they have risen since Trump’s election victory in November 2016. The NASDAQ is up 15.94%, the S&P 500 is up 11.59%, and 10-year yields have risen 24.19%, signaling that growth and inflation expectations are around the corner. The “Warren Buffett Indicator” measuring corporate equities against GDP is at its third-highest total in the post-World War II period. The current bull market is the second-longest in the history of America, all while corporate earnings have declined for six straight quarters. I could go on, but the insanity gripping the market is self-evident. A stock market crash 2017 (or beyond) could come at any time.
7 Longest Bull Markets In American History
| Years | Months | % Gain | End Decline |
| 1990–2000 | 117 | 473 | -49% |
| 1921–1929 | 97 | 396 | -86% |
| Mar. 2009–Feb. 2017 | 96 | 222 | stock market crash 2017? |
| 1949–1956 | 70 | 249 | -22% |
| 1982–1987 | 60 | 201 | -34% |
| 2002–2007 | 60 | 105 | -57% |
| 1932–1937 | 56 | 266 | -60% |
(Source: Scottsdale Bullion and Coin, last accessed April 25, 2017.)
All this is possible because the markets believe that growth, tax cuts, stimulus, et al are coming. The algorithms can grind the market higher as long as large selling remains at bay, which has been the vast majority of times. Don’t believe me? Just take a look at the market volume profile from the 2008 stock market crash to the present. We can see volume slipping away, the more that this bull market has matured. As long as belief and hope keep the itchy “sell” finger away, the melt-up might continue.
The stock market forecast for the next three months is very unpredictable, as a result. No one knows what the trigger event might entail, and a government shutdown could be the straw that breaks the camel’s back. Uncertainty breeds contempt and, in the age of runaway algorithms and extreme over-valuation, a government shutdown could be the catalyst that starts the avalanche rolling.
Even when this problem gets resolved, the solution will fix nothing. The U.S. government is burning cash at a rate of $75.0 billion per month, and Trump appears determined to slash personal and corporate tax rates at all costs. This may create the crack-up boom that Wall Street is looking for, but it will blow a $2.0 trillion revenue hole in the budget, which will need to be made up somewhere. In the end, the United States has a debt problem which is impossible to avoid.
And it may be getting worse.
The right-leaning Tax Foundation’s “Taxes and Growth” model forecasts that Trump’s tax plan would cut federal revenue by between $4.4 trillion and $5.9 trillion on a static basis. Even if we account for stimulatory effects to the larger economy, the Tax Foundation still forecasts that revenues would decrease on aggregate between $2.6 trillion and $3.9 trillion. (Source: “Details and Analysis of Donald Trump’s Tax Plan,” Tax Foundation, September 19, 2016.)
When will the stock market crash? The “big one” is long overdue, but it’s coming. The biggest rule of markets is that it’s never different this time, even when it seems like it is. Our stock market crash predictions 2017 reflect the belief that a black swan event, such as a government shutdown—combined with extreme overvaluation—will eventually lead to a stock market crash 2017 (or beyond).
After all, normalcy bias is a powerful thing. But these aren’t “normal” times.
