The U.S. is nearing a government shutdown. What that means for stocks and how we're playing it

Published Thu, Sep 28 20233:58 PM EDTUpdated Fri, Sep 29 20238:15 AM EDT

The U.S. is just days from a federal government shutdown at 12:01 a.m. ET on Sunday. If history repeats itself, the lapse in funding could actually set the stock market up for short-term gains. As of Thursday afternoon, lawmakers on Capitol Hill remained at an impasse over a budget resolution to keep federal agencies running beyond the end of the government's fiscal year on Saturday. While there would be major disruptions if Congress fails to reach at least a temporary agreement in time, stocks have typically gone up when the government shuts down. The S & P 500 has gained an average of 4.4% around government closures, according to Morgan Stanley , with the caveat that other macro factors could have also played a role. Raymond James found that during the five government shutdowns since 1995, the broad market index has advanced an average of 3.2%. "Markets are largely unaffected in the lead up to a shutdown, and on average continue to rise in the 30 days following the resolution of a shutdown," Raymond James analyst Ed Mills wrote in a recent note . Jim Cramer said this week that a potential government shutdown, coupled with the escalating United Auto Workers' strike against General Motors (GM), Chrysler-parent Stellantis (STLA) and Club name Ford (F), would "take out a big chunk of economic activity." As a result, he posits, the Federal Reserve might be able to ease up on its inflation-fighting monetary tightening campaign, which could boost stock prices as bond yields fall. The Fed has hiked short-term interest rates 11 times since March 2022, bringing the fed funds overnight bank lending rate to a 22-year high, in an effort to beat inflation. While the Fed left its benchmark interest rate unchanged at its recent September meeting, Chairman Jerome Powell said prices still need to come down. Central bankers signaled one more rate increase this year and fewer cuts next year, indicating the cost of borrowing money may be higher for longer. What is a government shutdown? Each year, lawmakers must pass budget legislation for the next fiscal year, beginning on Oct. 1. Time is running out for Congress to reach an agreement on spending as it remains divided over a laundry list of issues. If lawmakers don't come to a consensus before government funding expires at the end of the day on Saturday, many functions that are deemed non-essential will be disrupted or closed. Millions of federal employees would not receive paychecks during a shutdown. Even applying for services, such as passport processing, could be curtailed. Some government entities and functions, however, will still continue to operate. Social Security checks, for example, will go out. Active military members and law enforcement officers will continue working as well. What's next? Moody's warned that a shutdown would be bad for the country's credit. "While government debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of U.S. institutional and governance strength relative to other AAA-rated sovereigns that we have highlighted in recent years," analysts at the credit agency wrote in a note. "In particular," Moody's added, "it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength." The analysts blamed that political polarization for the nation's "widening fiscal deficits and deteriorating debt affordability." Wall Street is giving high odds that the government will shut down over the weekend. It's already happened several times in the past — specifically, funding has lapsed 14 times since 1980. Goldman Sachs put the chances of a shutdown at 90%, saying it could last around two to three weeks. "While there is still a chance that Congress can reach a last-minute deal to extend funding past Sep. 30, there has been little progress made and there is little time left," the analysts wrote in a note. "In the seemingly unlikely event Congress passes a short-term extension, we would still expect a shutdown sometime later in Q4," which begins on Monday. "If the government shuts down on Oct. 1, a quick reopening looks unlikely as political positions become more deeply entrenched," they added. Bottom line A government shutdown this weekend, along with the ongoing auto strike, could put a sizable dent in the U.S. economy, effectively doing some of the central bankers' jobs for them. Any signs the Fed might be considering pulling back on its monetary tightening could put pressure on bond yields — and in turn, lend a tailwind to stocks. Therefore, we're trying to get ahead of things, using uncertainty ahead of the looming budget legislation deadline as a potential buying opportunity — especially since the market is already oversold right now, according to the S & P 500 Short Rang Oscillator . We added to five Club holdings this week with one day to go. As a general rule of thumb, we've been watching out for high-quality companies that are profitable and have seen their stocks pull back. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

The United States Capitol building is seen in Washington D.C., United States on September 28, 2023.

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The U.S. is just days from a federal government shutdown at 12:01 a.m. ET on Sunday. If history repeats itself, the lapse in funding could actually set the stock market up for short-term gains.