CNBC’s Jim Cramer on Monday told investors why he believes that a government shutdown won’t have a major effect on the market, looking back at how stocks have reacted to shutdowns in the past. He said his primary concern is that the shutdown will delay the release of key economic data that informs the Federal Reserve’s decision on interest rates.
“When it comes to government shutdowns, my message is simple: keep calm and carry on, because the stock market tends to do just fine in these situations,” Cramer said.
Prediction markets are pricing in about a 70% chance that the federal government will shut down on Wednesday as members of Congress fail to agree on a stopgap bill to keep operations fully funded past Tuesday. Democrats are standing firm on their demands to include measures in the bill that protect Obamacare health insurance subsidies, while Republicans insist that such a debate should be put on hold until after a shutdown is avoided.
Cramer conceded that the idea of a shutdown seems unnerving, noting that this would effectively be the first full government shutdown since 2013. But he pointed out that the market has actually seen gains following two of the last three full shutdowns and suggested there isn’t a discernible trend of how stocks behave when the government halts operations, citing research from analysts at Bank of America. He also said it’s important to distinguish a shutdown from a debt ceiling default, which would jeopardize interest payments on U.S. Treasurys. Cramer noted that lawmakers just raised the debt ceiling, so even in the event of a shutdown, the U.S. can still pay bondholders.
While stocks may manage to weather a cessation of all non-essential government activities, Cramer said the shutdown would seriously hurt furloughed federal workers. Analysts from several major banks predicted that the shutdown could put 800,000 or 900,000 people temporarily out of work. Bank of America suggested each week of the shutdown could knock 10 basis points off the GDP growth, while Goldman Sachs predicted 15 points and Deutsche Bank proposed 20 points.
According to Cramer, those estimates indicate that a substantial number of Americans won’t be getting paid and won’t be willing to buy things. While he said a week of a shutdown might not have much of an impact, the broader economy could take a major hit if the shutdown drags on for three or four weeks.
Cramer also said he is a bit concerned that a shutdown will delay the release of vital economic data, giving investors and the Fed less insight into the state of inflation and the labor market. The delay might not seem like a big deal, Cramer said, but the central bank needs the information to decide whether to cut interest rates. Wall Street is expecting another cut, but Cramer said the Fed might be more hesitant to do so without adequate information. However, he also said the Fed might still cut because a shutdown is bad for the economy broadly.
“I’m not worried about most of this stuff. My biggest fear is that a shutdown will delay important pieces of economic data, making life more difficult for the Federal Reserve and potentially postponing their plans to cut interest rates,” he said. “I still think that’s a long-shot. Honestly, though, if the biggest fear from a government shutdown is delayed data collection, well, that’s not a reason to be concerned.”
