3 Truths About Government 'Shutdowns'

Includes: CXW, MANT, SRX
by: Lou Basenese

Without a budget agreement by midnight tonight, the lights will go out in Washington D.C.

I’m still trying to decide whether I should fear such a turn of events…or hope for it. While I figure it out, though, let me share three truths about government shutdowns we all need to keep in mind.

1. “Shutdown” is a Complete Misnomer

If Republicans and Democrats can’t hammer out an agreement today, the entire government will NOT shutdown. Let me repeat. The entire government will not shutdown.

As the Obama administration verified, a shutdown would impact about 800,000 government employees – the same number affected during the last shutdown in 1995. That’s out of about 2.15 million federal employees nationwide. So we’re talking about roughly 37% of the government being closed for business.

Thankfully, rhyme and reason – not randomness – prevail when deciding what government activities cease during a shutdown.

“Generally speaking, services that are critical to the safety of life and protection of property are excepted from a shutdown,” says Representative Jim Moran.

Services that have alternative funding or appropriations, which aren’t up for renewal every year – like the Veterans Affairs Department – are also immune to a shutdown.

Practically speaking, that means the mail keeps getting delivered… Social Security checks get sent … Military personnel keep getting paid (thank God)… Homeland Security is all systems go… And the air traffic control system continues to operate, although the latest news reports suggest these employees are in dire need of some rest.

Activities subject to suspension include national parks and museums, services offered by the National Institutes of Health and the Department of Health and Human Services, government websites and a significant number of staff at the White House.

Ironically, IRS filing and audit activities would cease. You’d think collecting tax revenue would be “critical to the safety of life” for such an indebted nation. Apparently not.

2. Hardly Rare… or Long-Lived

Don’t be misled into thinking government shutdowns are rare simply because it’s been about 15 years since the last one. The truth is, we’ve experienced a total of 17 government shutdowns since 1975.

By the same token, don’t give into any of the media fear-mongering. Or even President Obama’s rhetoric that a shutdown “could severely hamper the recovery and job growth.”

Why? Because shutdowns seldom last very long. Only eight have lasted more than three days. And the average shutdown duration is only 6.4 days.

Even if we’re in store for an extended one, the longest shutdown on record lasted 21 days, which isn’t much longer than some of the recesses that Congress routinely takes.

3. Stocks Don’t Care About a Government Shutdown

During the last two shutdowns, the stock market didn’t even suffer one percentage point of decline, according to Bespoke Investment Group.

In 1995, for example, the S&P 500 (NYSEARCA:SPY) index actually rose by 1.3% between November 13 and 19. And from December 15, 1995, to January 6, 1996, the index eked out a 0.1% gain.

So don’t expect stocks to tank on Monday if the government shuts down. If anything, a shutdown is only likely to hit the pause button on this current bull market, not end it prematurely.

The only stocks I’d be worried about are companies that derive 100% or more of their sales from the government (federal, state and local). They promise to be volatile in the short run, as uncertainty over receiving payments from the federal government rises. And in the long run, they’re also up against the prospect of budget cuts impacting business.

In terms of specific names, be wary of Corrections Corp. of America (NYSE:CXW), ManTech International (NASDAQ:MANT) and SRA International (NYSE:SRX).

Bottom line: A government shutdown sounds much scarier than it promises to be. Nor is it a very rare occurrence.

In fact, we could all be quoting Yogi Berra in September, saying, “This is like déjà vu all over again.” Because even if we miraculously avert a shutdown this weekend, any agreement is only good through September 30.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.