U.S. Congress under pressure to reach budget agreement ahead of October 1 deadline

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U.S. Congress under pressure to reach budget agreement ahead of October 1 deadline
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With the October 1 deadline for the U.S. federal government's budget looming, Congress is under pressure to reach an agreement. The potential for a government shutdown is expected to dominate political discourse and news headlines in the coming days. However, historical data suggests that such events have limited impact on the broader stock market, with corporate earnings and interest rates playing more significant roles.

Government contractors, including defense firms and healthcare companies, are typically the most directly affected by shutdowns. Despite this, Keith Lerner of Truist Advisory Services noted that while shutdowns often cause short-term market volatility and increase investor anxiety, they generally do not have a lasting impact on the market. According to Lerner's data, since 1976, there have been 20 federal government shutdowns, with an average duration of eight days. The S&P 500 has had an equal number of highs and lows during these periods, with an average return of exactly 0.0%.

Congress is also considering a one-month continuing resolution to start the fiscal year, which would provide additional time for negotiations but could lead to a new shutdown threat on November 1. This scenario could prolong market uncertainty and volatility.

While shutdowns tend not to have long-term effects on the market, they can still cause short-term economic disruptions. Goldman Sachs economists estimate that each week of a federal government shutdown decreases gross domestic product growth by approximately 0.2 percentage points, although this economic activity tends to rebound once the government reopens.

The Federal Reserve's current monetary policy strategy could be disrupted by a government shutdown due to potential limitations in access to official statistics from federal agencies. The first major data release potentially impacted would be the September jobs report due on October 6, followed by the September consumer price index on October 12.

In such a scenario, Fed officials would have to rely on alternative data sources such as state-gathered data, the monthly ADP report on private-sector employment, and nongovernment surveys. However, these sources do not provide as comprehensive a view of the economy.

The Federal Open Market Committee's next interest-rate decision, scheduled for November 1, could be affected by a lack of timely data due to a prolonged government shutdown. This could potentially lower the likelihood of a quarter-point rate increase, currently estimated at one-in-three by futures markets.

As negotiations continue, the Department of Defense personnel's payment date on October 13 is seen as a strong incentive to reach a resolution soon.

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