As the clock ticks down, Congress is running out of time to avoid a partial government shutdown. This familiar scenario is likely to be resolved in the eleventh hour, serving as a preamble to a larger spending battle looming later this Spring.

Implications of a Looming Shutdown

Should a new spending agreement fail to materialize by midnight Friday, federal appropriations in key sectors such as Housing and Urban Development, Agriculture, Transportation, and Veterans Affairs would lapse. This could lead to delayed paychecks for countless federal workers and place essential services for low-income Americans, like food stamps and housing vouchers, at risk. If Congressional negotiators can't find common ground by the subsequent Friday, the entire government faces shutdown.

Areas Unaffected and Presidential Action

Certain areas of spending, such as mandatory programs like Social Security, which operate independently of shorter-term appropriations bills, will remain unaffected. Moreover, flights are expected to continue as usual due to the essential nature of many FAA and TSA employees. Similarly, VA benefits including pensions and healthcare services will continue uninterrupted.

Negotiation Efforts and Roadblocks

President Joe Biden is set to meet with Democratic and Republican leaders to navigate towards a consensus on Tuesday. The most probable scenario at present appears to be another "continuing resolution," maintaining funding at current levels while allowing lawmakers more time to hash out a sustainable solution. Alternatively, Congress could opt to expedite permanent appropriations bills.

A potential obstacle arises in the form of Speaker of the House Mike Johnson (R., La.), who is treading carefully amidst the right-wing faction of his party. The House Freedom Caucus has set forth demands that are deemed non-starters by Democrats, including defunding "diversity, equity, inclusion" executive orders and zeroing out Homeland Security Secretary Alejandro Mayorkas' salary. Despite these challenges, analysts foresee Johnson yielding in the budget showdown to avoid potential backlash from voters should a shutdown occur.

The Unlikely Possibility of a Government Shutdown

As noted by Beacon Policy Advisors in a recent analysis, the chances of a government shutdown seem slim. However, the potential implications of such an event could be significant, particularly for politicians like Johnson who are already facing challenges in maintaining their political standing.

Market Impact of a Shutdown

Historical data suggests that a temporary government shutdown is unlikely to cause any major disruptions in the stock market. Over the past five decades, the median return of the S&P 500 during a shutdown has been 0%, with markets actually seeing an increase of 1.3% in the month following a shutdown. Typically, these shutdowns have lasted around five days.

Looming Deadline and Investor Concerns

While a shutdown may be avoided through a continuing resolution, investors are now turning their attention to the deadline at the end of April. If the government remains under a continuing resolution at that time, automatic spending cuts of 1% could come into effect.

Political Strategy and Congressional Dynamics

The decision-making process in Congress is complex, especially when it comes to fiscal matters. Johnson, for example, finds himself at a crossroads where he must navigate between party priorities and his constituents' interests. By choosing to prioritize job security over giving in to pressure from the far-right wing of his party, Johnson is making a calculated political risk.

According to Stephen Myrow of Beacon Policy Advisors, Johnson's stance reflects a strategic move to maintain his party's majority in the upcoming election. The potential consequences of a shutdown or drastic spending cuts could outweigh the political gains for Johnson and his colleagues.

In the end, investors may find themselves once again caught in the midst of Washington politics, where outcomes have little lasting impact on financial markets.

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