Looming Gov’t Shutdown Largely a Negotiating Tactic - Butler Financial, LTD
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Looming Gov’t Shutdown Largely a Negotiating Tactic

A December 21 government shutdown should not elicit a market reaction from investors, says Washington Policy Analyst Ed Mills.

December 17, 2018

The threat of a government shutdown at the end of December has created volatility, which we view as largely a negotiating tactic that should not elicit a market reaction if it becomes reality. The debate comes down to the level of funding for President Trump’s central campaign promise of constructing a border wall and is serving as a public test of his negotiating style. Lack of a deal that leads to a shutdown would be a “shutdown” in name only as much of the government’s funding is already agreed upon. Trump’s handling of this debate may be seen as an indicator of how high-stakes negotiations with China are playing out, potentially adding to the sensitivity seen in the market.

Factors at Play

President Trump wants $5 billion in funding added to the Department of Homeland Security (DHS) budget for border wall construction while Democratic leaders insist the previously agreed $1.3 billion is their red line. A final funding package must be passed before December 21 – the Friday before Christmas – or DHS, the Treasury Department, Department of Justice, and SEC will be shut down. The rest of the government’s funding has been agreed to and will not be affected. The pre-Christmas deadline will encourage lawmakers to find a deal sooner rather than later (or agree to proceed with a shutdown) and conclude business ahead of the holiday.

The partial shutdown is largely by design to create an impactful headline and elevate the debate over border security in a time of heightened uncertainty in DC. Thirteen days will pass between the time funding expires on December 21 and the Democrats taking control of the House in January, at which point a temporary funding package could be passed to end the shutdown and extend the debate. Politically, it’s difficult to see how the President could get an increase to $5 billion where it would need 60 votes with Democratic support in the Senate, so the elevation of a central campaign theme to the height of public debate could be the sole win for Trump on the issue.

Trump’s Negotiating Style Is Front and Center

The dynamics of the discussions are designed to play to Trump’s strength of public debates on highly contentious issues and forcing his opponents to play defense – reminiscent of candidate Trump on the debate stage. It remains to be seen how a shutdown would play politically. Trump is banking on appearing strong in his demands and will certainly label this the “border security shutdown” to score a political win. Investors may be treating this negotiation as insight into the President’s ability to cut a deal as discussions with China on trade are top of mind. If Trump ultimately ends up looking weaker as a result of a shutdown with no spending increase for border wall funding, markets may view Trump’s negotiating tactics with skepticism when it comes to a much more high-stakes debate with market ramifications.

Preview of Events to Come?

Tuesday morning’s meeting between Trump and Democratic leaders Pelosi and Schumer provided a glimpse of what the next two years may look like for the President as he prepares to navigate an unfamiliar Washington that’s partly now run by the opposing party. With the legislative path to political victories much more difficult, Trump may turn more to executive orders and other administrative actions for accomplishments ahead of the 2020 election cycle. This dynamic may add to volatility given the relatively quicker implementation of executive actions.

Quietly, Congress Advances Legislation

While public debates dominate the headlines, Congress has passed a five-year, $867 billion extension of the farm bill that notably includes the legalization of hemp products derived from cannabis cultivation. The legality of hemp commerce currently varies by state but the provision in the farm bill will provide national legal certainty, creating an opening for a national commercial hemp market. President Trump is expected to approve the bill shortly.

All expressions of opinion reflect the judgment of the Equity Research Department of Raymond James & Associates, Inc. and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. Please consult a financial advisor for your specific situation.

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