A Retrospective View: Tracking the Impact of the US Government Shutdown on Financial Market Trading

The United States government shut down on 22 December 2018 and reopened on 25 January 2019. This is the longest shutdown in the history of the United States. Furthermore, the agreement between Donald Trump, the forty-fifth president of the US and the US Congress was only for three weeks. It is now May 2019, and there has been no further mention of a second shutdown. However, it is still vital to consider the repercussions of such an event on the global financial markets retrospectively.

Before we look at the impact of the longest shutdown in the United States history, let’s have a quick look at what a government shutdown is and why it happens.

Understanding the US government shutdown

Primarily, according to Wikipedia.com, a government shutdown in the USA occurs when there is a failure by the US Congress, consisting of both the House of Representatives and the Senate, to agree on, and pass the necessary appropriation bills to ensure that government agencies are funded for the next fiscal year. This usually occurs when there is a disagreement between the two houses in the US Congress or between Congress and the US President.

Also, a government shutdown can be a partial or a complete shutdown. A partial shutdown tends to only target non-essential services while a full shutdown will bring the country to a standstill.

However, the salient point here is that because no money has been allocated to funding the different government departments, employees do not get paid their salaries during the shutdown. You can imagine the chaos this causes. Employees cannot meet their monthly financial commitments, unless they have personal savings that they can draw on. Worst case scenario, they do not even have money to buy food or pay for the cost to keep a roof over their head.

The compounding effect of the US government shutdown

The effects of a lengthy government shutdown have a compound effect on both the individual American citizen, the USA economy, and by extension, the global economy.

Why?

US debt levels rise when there is a government shutdown as government employees do not get paid, so they have to borrow money to meet their monthly expenses. This, in turn, affects retail sales as most people will spend less and more people are likely to declare themselves bankrupt. Therefore, the United States runs the risk of its federal economy turning from a situation of positive to negative growth.

However, it should be noted that this is a worst-case, theoretical scenario. On the other hand, there is no doubt that a government shutdown for any length of time is a dangerous situation and must be resolved as soon as possible. Otherwise, the longer the shutdown, the more severe the consequences on the US economy.

Also, succinctly stated, the USD is the world’s reserve currency. Therefore, US monetary policy affects the rest of the world. Also, when the American financial markets are trading lower because of circumstances within the USA, it has a knock-on effect on the rest of the world’s financial markets, which then translates into increased market volatility.

Trading under these conditions

As discussed, many times in the past, it is possible to trade CFDs successfully in volatile market conditions. In fact, the higher the market volatility, the greater the chance of making highly profitable trades.

However, it must also be emphasised that the greater the market volatility, the higher the risk of what starts out as a winning trade to turn and end up as a losing trade. Essentially, the higher the risk, the higher the financial reward and the potential for making substantial financial losses.

Therefore, if you plan to embark on a financial market journey, should similar scenario occur again, it is vital to make sure that you know what you are doing before you open and close trading positions. And, part of setting up a successful trade is knowing at what points to set stop-loss and take-profit values before opening a trading position. This will ensure that you get out of a losing trade but let a winning trade run for long enough so that you capitalise on its positive momentum.

It is equally important to ensure that you plan your trading strategies properly before you place any trades. This must include the study of statistical analysis tools by looking at historical and current price movement data to forecast future price movements.

Finally, as mentioned above, it is possible to trade successfully and profitably, if you plan your trade carefully and you don’t jump into a trade too quickly by guessing which way an asset’s price will move.

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