Lawmakers will have to quickly get to work on a new budget deal after they return from their summer break. A new deal will have to be reached by September 30th in order to avoid a government shutdown. Stifel Chief Washington Policy Strategist Brian Gardner says a shutdown is "pretty likely," adding that House Speaker Kevin McCarthy is being pressured by the far right members of his party to shut the government down. Gardner says the odds of a shutdown are above 50/50, specifically he thinks there is more of a 60%-65% chance of a shutdown. Fitch cited lawmakers' brinkmanship over financial issues as one its reasons for downgrading the United States' credit rating. Gardner thinks both Republicans and Democrats will use the downgrade to make their case for why the government should or should not be shut down. Overall however, Gardner doesn't think a shutdown will have a major impact on the markets. Garner tells Yahoo Finance Live he is telling clients to "stay calm, ignore it, pay attention to fundamentals, monetary policy, the stuff that typically drives markets during these shutdowns."

Video Transcript

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SEANA SMITH: Congress is still on recess. But lawmakers are set to be put to the test next month when they return to Capitol Hill. The two sides need to reach a deal on next year's budget by September 30 to avoid a government shutdown. Joining us now for more is Brian Gardner, Stifel Chief Washington policy strategist.

Brian, it's good to see you here. So I think a lot of people are trying to figure out how likely a government shutdown is going to be, whether or not both sides are going to be able to reach a deal before that September 30 deadline. What do you think?

BRIAN GARDNER: I think it's pretty likely. I mean, Speaker McCarthy is getting a lot of pressure from the right to shut down the government. He's trying to push back against them, arguing that a shutdown actually hurts the ongoing investigations that are going on into Hunter Biden and related matters. And so he's arguing it's in Conservatives' interest to keep the government open. But I don't think that-- I'm skeptical that argument is going to hold a lot of water with the Conservatives.

So I think a shutdown certainly above 50/50. I'm probably in the 60% to 65% range at this point.

AKIKO FUJITA: Yeah. You know, Brian, we're less than what a month since Fitch came out and downgraded the credit rating for the US, specifically citing politics. I mean, how much of that does that play into these negotiations and the consideration of what the impact of a shutdown would look like?

BRIAN GARDNER: Yeah. So I think it's a talking point for both sides. So those who are arguing against the government shutdown are going to argue the Fitch downgrade and say, look, you know, we don't have-- we don't have consensus. It's government by chaos. And this is exactly what Fitch warned us about.

At the same time, the Conservatives who are arguing and pushing for a shutdown will say, look, the government's spending too much money. We have to get our house in order. Fitch was absolutely right. So they're both going to point to Fitch but for different reasons.

SEANA SMITH: Brian, do you think history is still a good guide for what could happen here, given the fact that we did have this warning from Fitch and the fact that there's so much-- there's such a massive political divide right now between the two sides?

BRIAN GARDNER: Yeah. So when I look back over the last 50 years, there have been numerous shutdowns. And I'll whittle it down, because a lot of those shutdowns are over weekends, holidays. And so there's no market impact. And there's really no economic impact. So if you get to the six or seven times the government has shut down for five or more trading days, I don't think you can get a good correlation to a market move.

Matter of fact, the last shutdown we had was one of the longest if not the longest shutdown we've ever had-- 34 days from December of 2018 into January 2019. During those 34 days, the market rose 10%. So to get a correlation between a shutdown and the market I don't think works. So what I'm telling our clients is there's going to be a lot of political noise over the next couple of weeks.

But based on history, just stay calm, ignore it. Pay attention to the fundamentals monetary policy, the stuff that typically drives markets during these shutdowns. It's just not the shutdown itself.

AKIKO FUJITA: So it's a non-event from a market perspective?

BRIAN GARDNER: I think so, yes. I mean, I think there are other geopolitical and government policy-related actions that will drive the markets. My advice to our clients has been the shutdown is not one of those. There will be some economic disruption. But it really delays the economic activity, more than anything else, because once the government reopens, all that activity resumes and to the extent that payments were delayed. Everything is made whole. So it's really just a delay. It doesn't change the overall trajectory of the economy.

And I think that's why when you look back over history, the markets have reacted the way they have. Investors are really smart. They really look through the history-- the political noise of this and get to the economic impact. And I think the economic disruption, it's short term, it's inconvenient. But it reverses itself very quickly and doesn't have a big, long-lasting impact on the economy. And so investors, for the most part, just shrug it off.

Again, we're going to have the Fed coming out of Jackson Hole. We have a September meeting. I would argue that September meeting is going to have more of an impact on the market than a shutdown will. And they're only about two weeks apart.