In our update last month, we noted that the federal government could shut down on April 29 for lack of Congressional funding, a development that might have market consequences.
As things stand now, government funding runs out on April 28. If Congress does not pass appropriations legislation to fund the government beyond that date, then on April 29 the government will shut down.
An appropriations bill requires 60 affirmative votes in the Senate to overcome a filibuster. Because the Republicans hold only 52 Senate seats, some Democratic support is necessary for passage. President Trump is calling for cuts in domestic spending, as well as the appropriation of additional funds to build a wall on the U.S.-Mexican border. Democrats have indicated they will oppose these objectives.
Pressure in the House comes from the other direction, where fiscally conservative Republican members are demanding deeper cuts in spending. Reaching compromise among these factions in the next few weeks will require serious effort.
The prospect of a shutdown could roil the markets, at least in the short term. If it becomes apparent that Congress might not pass funding legislation by April 28, the markets could retreat. Businesses are looking forward to tax reform legislation that would cut their tax rates. The failure of Congress to pass straightforward legislation to keep the government operating could suggest that passing comprehensive tax reform legislation will be more difficult than expected. A similar result occurred recently when the Republicans’ failure to pass legislation to replace the Affordable Care Act led to the largest one-day drop in the market since the election. Investors then were not as concerned with the content of the failed health care bill as they were with whether the failure suggested that Congress will be unable to agree on tax cuts as well.
Unlike the appropriations bill, however, tax legislation requires only 51 affirmative votes in the Senate and thus may be passed without any Democratic support. We continue to believe that Congress is likely to pass tax relief legislation this year. Thus, we regard an April market drop in anticipation of the need for appropriations legislation, if it occurs, to be a possible buying opportunity.
Andrew H. Friedman is the principal of The Washington Update, LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. They may be reached at www.TheWashingtonUpdate.com.
The authors of this paper are not providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.
Copyright Andrew H. Friedman 2017. Reprinted by permission. All rights reserved.
