Once again, we are hearing about the need to increase the debt ceiling and a possible government shutdown. These events are not unprecedented, yet for many, the concepts of the debt ceiling and government shutdowns can be confusing and overwhelming. Shutdowns are not uncommon; the U.S. government has shut down a total of 21 times since Congress introduced the Congressional Budget and Impoundment Control Act, which established the federal budget process in 1976.

The debt ceiling is the maximum amount that the government can legally borrow to meet its financial obligations. If Congress fails to approve a budget or continuing resolution, the government must shut down all but essential services. The relationship between these two events is complex, and their impact on the economy can be significant but not unprecedented. These events will have little effect on investors who are well positioned with a good plan.

Increases to the Debt Ceiling: A Brief History

U.S. debt ceilings date back to 1917, but it wasn’t until 1939 that they were codified into law. With the most recent hike in August of 2022, Congress brought the debt ceiling up to a whopping $22 trillion.

In recent years, raising the debt ceiling has become an increasingly divisive political issue, with both parties using it as a negotiation point. In 2011, the United States came perilously close to defaulting on its debt due to the debt ceiling crisis, which resulted in a sharp decline in the stock market and a downgrading of the country’s credit rating.

In 2013, a disagreement over funding for the Affordable Care Act caused a shutdown that lasted for 16 days. As a result of these developments, there have been further calls for the debt ceiling mechanism to be reformed.

Shutdowns in Government: A Brief History

When Congress fails to enact a budget or continuing resolution, the government temporarily stops providing services that aren’t considered essential. The first shutdown happened in 1976, but they’ve been more common as of late.

There have been a total of 21 government shutdowns, with the most recent in December 2018. The shutdown lasted 35 days, from December 22, 2018, to January 25, 2019. It was the longest shutdown in U.S. history. The cause was a disagreement between Congress and the president over funding for a border wall between the United States and Mexico.

When federal workers and contractors aren’t getting paid because of a shutdown, it can have a negative effect on the economy as a whole — and they may impact consumer confidence and be negative fodder for the media — yet shutdowns have historically had little impact on the stock market.

An LPL Financial study that examined stock market activity over 18 government shutdowns, spanning the period from 1976 to 2013, found that shutdowns have had no impact on performance — the median change in the S&P 500 was 0.0 percent. In fact, LPL’s senior market strategist noted that the S&P 500 has actually gained during each of five previous shutdowns.

Our Team Will Help You Prepare and Benefit from Uncertainty

As with any trending event, it’s important to step back and look at facts versus hype. Your financial plan should anticipate periods of volatility — including a government shutdown and/or debt ceiling — and ensure that you have cash to ride them out. Working with an experienced team can help you minimize stress and make decisions logically versus emotionally. With the proper guidance, you may be able to benefit from uncertainly around a debt ceiling debate and/or government shutdown.

We expect to hear the refrain from the media and pundits who are selling everything from newsletters to doomsday supplies that this time it’s different. It’s not. As stated, there have been 21 government shutdowns and virtually no impact on the stock market.

Our team has more than 250 years of combined experience with all kinds of market and economic conditions, including government shutdowns. We will guide you through whatever comes your way. Uncertainly can present an opportunity to benefit in the long run.

Please reach out if you have questions or concerns about current events or your portfolio or if we can otherwise be of service. Your vision is our priority, and your financial well-being is our passion. We look forward to connecting with you.

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Randy Carver, CRPC^®, CDFA^®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Carver Financial Services, Inc., was established in 1990 with the vision of making people’s lives better — clients, team and community. With this mission, Carver Financial Services has grown to be one of the largest independent financial services offices in the country, managing $2.3 billion in assets for clients globally, as of March 2023. You can reach Randy directly at randy.carver@raymondjames.com and in the office at (440) 974-0808.