Our Deputy Head of Global Research Michael Zezas explains why the
risk of a new U.S. government shutdown is worth investor
attention, but not overreaction.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Michael Zezas, Deputy Head
of Global Research for Morgan Stanley.
Today, we’ll discuss the possibility of a U.S. government
shutdown later this week, and what investors should – and should
not – be worried about.
It’s Wednesday, January 28th at 10:30 am in New York.
In recent weeks investors have had to consider all manner of
policy catalysts for the markets – including the impact to oil
supply and emerging markets from military action in Venezuela,
potential military action in Iran, and risks of fracturing of the
U.S.-Europe relationship over Greenland. By comparison, a
potential U.S. government shutdown may seem rather quaint.
But, a good investor aggressively manages all risks, so let's
break this down.
Amidst funding negotiations in the Senate, Democrats are pressing
for tighter rules and more oversight on how immigration
enforcement is carried out given recent events. Republicans have
signaled some openness to negotiations, but the calendar is
really a constraint. With the House out of session until early
next week any Senate changes this week could lead to a lapse in
funding. So, a brief shutdown this weekend, followed by a short
continuing resolution once the House returns, is a very plausible
path – not because either side wants a shutdown, but because they
haven’t fully coalesced around the strategy and time is
short.
Of course, once a shutdown happens, there’s a risk it could drag
on. But in general our base case is that the economic impact
would be manageable. Historically, shutdowns create meaningful
hardship for affected workers and contractors. But the aggregate
macro effects tend to be modest and reversible. Most spending is
eventually made up, and disruptions to growth typically unwind
quickly once funding is restored. A useful rule of thumb is that
a full shutdown trims roughly one‑tenth of a percentage point
from the annualized quarterly GDP for each week it lasts. With
several appropriations bills already passed, what we’d face now
is a partial shutdown, meaning that figure would be even
smaller.
For markets, that means the reaction should also be modest.
Shutdowns tend not to reprice the fundamental path of earnings,
inflation, or the Fed – which are still the dominant drivers of
asset performance. So, the market’s inclination will likely be to
look past the noise and focus on more substantive catalysts
ahead.
Finally, it’s worth unpacking the politics here, because they’re
relevant. But not in the way investors might think. The shutdown
risk is emerging from actions that have contributed to sagging
approval ratings for the President and Republicans – leading many
investors to ask us what this means for midterm elections and
resulting public policy choices. And taken together, one could
read these dynamics as an early sign that the Republicans may
face a difficult midterm environment. We think it's too early to
draw any confident conclusions about this, but even if we could,
we’re not sure it matters.
First, many of the most market‑relevant policies—on trade,
regulation, industrial strategy, re‑shoring, and increasingly
AI—are being executed through executive authority, not
congressional action. That means their trajectory is unlikely to
be altered by near‑term political turbulence. Second, the
President would almost certainly veto any effort to roll back
last year’s tax bill, which created a suite of incentives aimed
at corporate capex. A key driver of the 2026 outlook.
Putting it all together, the bottom line is this: A short,
calendar‑driven shutdown is a risk worth monitoring, but not one
to overreact to.
Thanks for listening. If you enjoy Thoughts on the Market, please
leave us a review. And tell your friends about the podcast. We
want everyone to listen.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.