What a Government Shutdown Means

 

What the Government Shutdown Means

A historical perspective for investors

In the three weeks leading up to the U.S. government shutdown, many economists suggested that the markets had already priced in such a scenario, but others were not so sure. And it’s really hard to tell because the S&P 500 leapt 2.6% in the first week, followed by a jump of 1.6% in the second and a skip of 0.9% in the third week. On the other hand, the prospect of a shut-down did help further drive down the U.S. dollar and cause Treasuries to rise.

So, what impact might this shutdown have on the stock market and could the shutdown be what finally cools this almost 9-year bull market? History suggests otherwise.

 

Historical Performance

Since 1976, the U.S. government has shut down a crazy 18 times. And the impact on the stock markets – on average – has been to push the market down a little bit. On average those 18 shutdowns lasted seven days and market fell 0.6%. Further:

  • Half the time the markets were up and half the time they were down;
  • The largest decline was 4.4% in 1979;
  • The biggest gain was 3.1% in 2013;
  • The longest was at 21 days in 1995; and
  • The shortest was a single day.

In recent years, the stock market has shown a remarkable ability to pay little heed to natural disasters, global political concerns and terrorist attacks, so few people expect this shutdown to be any different.

Economists will suggest that for every week of a government shutdown, GDP growth could shrink by 0.1% – 0.2%, but that is likely to be regained shortly after a shutdown is over. Other economists suggest that a shutdown could continue to drive the U.S. dollar down or push some commodities to rise. Time will tell.

An Advisor’s Biggest Worry

The biggest worry that few people are talking about is this: there will be an immediate impact on the 2.8 million civil servants and their families that won’t receive a paycheck because of this political brinkmanship. That is a very big worry and one that we should all think about and do whatever we can to help.