The longer Washington stays closed, the more Wall Street starts to notice. At least, that's the theory most investors subscribe to. After all, federal government spending accounts for nearly a quarter of U.S. gross domestic product (GDP). When that much economic activity suddenly stops, the ripple effects can start to pile up quickly.
Employees and contractors stop getting paid. Permits and approvals grind to a halt. Sentiment starts to wobble, and the businesses that depend -- directly or indirectly -- on that spending face the consequences.
Image source: Getty Images.
At this writing, the S&P 500 is down just 0.3% since Oct. 1. However, beneath that calm surface, a widening gap between winners and losers is emerging in economically sensitive corners of the market that rely on consumer and business confidence.
The short-term winners are also equally telling. Four sectors -- utilities, healthcare, consumer staples, and technology -- are all outperforming the benchmark, thanks to a largely defensive mix of companies that offer steady dividends, stable revenues, and reliable profits.
That said, six of 11 large-cap sectors are now trailing the S&P 500 since the shutdown began Oct. 1. Many of these sectors share sensitivity to government policy, and exposure to interest rates and regulation. Let's take a closer look at the three sectors struggling the most.
1. Energy
So far, energy sector stocks are the biggest decliners in the first three weeks of the shutdown. They've shown a 3.8% decline that includes a 6.5% slump in the Exploration and Production sub-industries, according to Koyfin data.
The largest effect so far can be seen in the inverse price action of gold and crude, with the precious metal rising 12.6%, and oil prices falling about 9% in under three weeks.
As far as individual energy names go, Occidental Petroleum (OXY +2.00%) is down 13.4% during the shutdown, shedding about $6 billion in market value along the way. The Houston-based oil company will report its third-quarter earnings Nov. 10, followed by a conference call the next day.
NYSE: OXY
Key Data Points
2. Financials
The second shutdown laggard of note is the financial sector, which is off 3.1% in October, and has been led lower by a 6.7% drop by the regional banks. Consumer concerns, tight household budgets, and deteriorating credit conditions have stoked a rise in loan delinquencies, especially among mid- to lower-end borrowers.
While the big banks have investment banking, diversified fee income, and trading desks to fall back on, regional lenders -- like PNC Financial (PNC 0.39%), Fifth Third, and KeyCorp -- are more closely tied to traditional lending and economic conditions.
Pittsburgh-based bank PNC Financial, which has been in business since 1865, has seen its stock slide over 8.6% month-to-date, pushing its year-to-date performance into the red, at -6%.
NYSE: PNC
Key Data Points
Insurance stocks are also struggling inside the broader financial sector this month. Progressive and Allstate are both down about 10% since the shutdown, amid worries that a slowing economy could crimp growth in premiums.
3. Communications
The communications sector suffered a nearly 3% decline. Even so, this sector is still the top performer over the past year and is still sitting on a 28% gain, which is almost double the advance of the S&P 500.
Within the group, News Corp's (NWSA 0.49%) 9% sell-off this month makes it one of the weakest-performing names among the 24 large-cap peers that make up the sector. This includes larger media rivals such as Meta Platforms, Alphabet, Netflix, and Warner Bros. Discovery.
NASDAQ: NWSA
Key Data Points
Economic concerns, worries about tightening ad spending, and new, deep-pocketed competition and industry disruption in the form of Paramount Skydance (PSKY +0.36%), which is down nearly 13% this month, have all weighed on this once-hot sector.
One caveat
While there is no telling how long the current shutdown will last, recent history shows that shutdowns have not triggered big stock market losses. If anything, the three longest shutdowns -- dating back to 1996 -- delivered either solid gains or flat returns.
These include a 10% gain in the 35-day government closure from Dec. 22, 2018 to Jan. 25, 2019, during President Donald Trump's first term; a 2% gain during the 16-day Obama-era shutdown in 2013; and a flat result during the 21-day closure from Dec. 16, 1995 to Jan. 25, 1996.
