Welcome to “The Big What If.” During the last week of every month, I will identify the next month’s most important potential market-moving event. In short order and with a chart or two, I will examine the event’s likely impact on markets and what, if anything, investors should do about it. So, what’s February’s “Big What If”?

It’s the Final Shutdown

On January 25, President Trump signed a stopgap spending bill that reopened the US government after the longest shutdown in history—35 days. However, the bill restores normal operations for federal agencies for just three weeks, until February 15. Notably, the bill doesn’t include any money for Trump’s central campaign pledge of a wall along the US-Mexico border.

According to the nonpartisan Congressional Budget Office (CBO), the 35-day shutdown shaved 0.4% from the US economy’s annual rate of growth in the first quarter of 2019. The partial government shutdown will cost the economy roughly $3 billion in lost output this year. However, this estimate doesn’t include the indirect negative effects on businesses that couldn’t obtain federal permits or access loans during the shutdown.1 Also potentially tied to the discord in DC, the Conference Board reported on January 29 that its index of US consumer confidence fell to 120.2 in January. That’s down 17.7 points from October, the largest three-month decline since October 2011.

 In this uncertain environment, 17 lawmakers from the House and Senate Appropriations Committees will try to reach a compromise on border security funding that will meet the president’s approval. For his part, Trump has set the odds that this group of nine Democrats and eight Republicans will arrive at an acceptable deal before the next government funding lapse at “less than 50-50.”

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Source: CNN, January 30, 2019

Weapons of Mass Shutdowns

Should investors expect another government shutdown in mid-February? It would be the fourth shutdown in the last 12 months, although the first two shutdowns of the Trump presidency lasted a total of just four days.

Shutdowns are lousy leverage, but has this stubborn president learned that lesson? Importantly, the humiliating defeat of opening the government without getting a dime for his beloved border wall may have enraged Trump’s faithful base. Meanwhile, both the president and his favorite barometer of success, the US economy, will likely bear the brunt of the detrimental record-breaking shutdown. For investors, ongoing spending negotiations likely will result in more wild price swings over the next several weeks.

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Source: Bloomberg Finance L.P., as of January 30, 2019.

Historically, government shutdowns haven’t had longer-term negative consequences on the stock market or the economy. But this time might be different. Where these negotiations land mid-February could determine if the country has a lame duck president for the next two years. Realizing the challenges of working with this Congress, Trump will resort to more executive action to govern. And this dynamic will set the tone for what is likely to be the wildest and most expensive presidential election in US history. There’s a lot at stake—which is why the 2020 presidential race has already begun.

Despite Trump’s skepticism about reaching a deal by the mid-February deadline, I believe that the president is a shrewd negotiator who realizes that shutting down the government again has very little upside for his policy agenda. Therefore, I expect the administration to save face with a compromise that includes significant funding for border security, but probably nothing for a concrete wall. Shamelessly, both political parties will claim victory. The best that can be said of this outcome is that it will remove an obstacle from US economic growth and stock market performance in 2019.

1Kate Davidson, “CBO: Shutdown Will Cost Government $3 Billion of Projected 2019 GDP,” The Wall Street Journal, January 28, 2019.