Stocks fell Monday morning on the threat of a government shutdown as part of the Republican strategy to defund Obamacare, bringing the market down again as part of a series of budget scares that have hurt the market annually over the last few years.
With the Dow Jones going as far down as 170 points, the S&P index and Nasdaq composites down as well, and the market’s “fear gauge,” the Volatility Index, up 1.09 points, uncertainty about whether the U.S. government would continue operations is clearly dragging the market down. With the nation’s growth already weak, the prospect of the U.S. government sending employees home, not paying its debts, and pulling out of its many other economic contributions stands to derail the entire recovery. Fourth-quarter growth in the US is projected to experience a 0.2 percentage drop every week as long as Congress keeps the government shutdown.
The looming shutdown threatens not only investor and consumer confidence, but also corporate profits going into the last three months of the year, as furloughs of government employees stand to have a ripple effect in the economy.
The energy industry is especially threatened. Oil prices are already down to a three-month low today, with U.S. crude oil prices down 1.1 percent on the New York Mercantile Exchange. While the average American might welcome an accompanying drop in gas prices, the overall effect on the economy would likely be negative. And the impact on America’s energy wealth from a government shutdown would be more direct as well.
According to analysis by Politico, furloughs would bring permits to drilling for oil and gas to a halt, because there would too few employees to process them. Projects in the renewable energy industries would cease as well. Only 6% of EPA employees would be coming to work.
The U.S. government hasn’t been shut down since the Clinton administration, but if the Republican-controlled House and the Democrat-controlled Senate cannot agree on a bill that President Obama will sign by midnight, the shutdown will happen in a matter of hours.
Along with other threats like debt default and other government dysfunction, shutdown scares have been driving the stock market down on a semi-yearly basis for the past four or five years. Every time a deadline looms, it seems to be an excuse for another round of Congressional squabbling, rather than attempts at compromise or problem-solving, and the effects are felt painfully by investors. Partisan brinksmanship that regularly imperils the entire U.S. economy seems to have become the new normal.
However, Wall Street has yet to adjust to these recurring economic threats. The volatility that accompanies this chronic political stonewalling has a consistent negative effect on marketing conditions. As Tobias Levkovich, a strategist in investments for Citigroup, told USA Today, “The rancorous debate in Washington does little to generate investor confidence.”
In fact, given the central position of the U.S. economy, this dysfunction radiates out into world markets as well. These effects were on display today, as global stocks fell. In Japan, the Nikkei index fell 2.1%. Major market indexes in Britain, France, and Germany were all down between 0.8% and 1%. The Italian FTSE MIB index suffered a 1.2% drop, while the Hang Seng index in Hong Kong fell 1.5%. As usual, these shutdown scares don’t just drive the U.S. stock market down, but threaten economies worldwide, as nations on six continents still struggle to recover from the global recession.
Written By: Jeremy Forbing