Federal government shutdowns aren't bad for stocks, at least historically speaking.
Although the market hates the threat of a federal government shutdown – an outcome that looks increasingly possible later this month – the S&P 500's performance during past shutdowns has been pretty good.
If our latest brush with a potential government shutdown seems particularly irksome, it may be because Congress has to negotiate deals to avert two shutdown deadlines: January 19 and February 2. Also not helping matters is the fact that equities are off to a rough start in 2024.
The tech-heavy Nasdaq Composite, which generated a total return (price change plus dividends) of 45% last year, lost more than 3% over the first three sessions of 2024. The blue-chip Dow Jones Industrial Average is having its worst start to a year since 2016.
Given this backdrop for equities, it's fair to say that dysfunction in D.C. doesn't help.
Stock performance during government shutdowns
Happily, for market participants, the historical record for stocks when the federal government shuts down is far from one of doom and gloom.
There have been 21 government shutdowns since 1976, but on only four occasions were operations affected for more than one business day, writes Jeffrey Buchbinder, chief equity strategist at LPL Financial. That leaves us with only four "true" shutdowns, Buchbinder notes, the last occurring in late 2018 into early 2019.
It's tough to remember now, but the S&P 500 returned 10.3% during the 35-day shutdown of 2018-2019. Have a look at the chart below:
(Image credit: YCharts)
Stocks did fine during the extended shutdown of October 2013 too.
"Historically, markets were not materially impacted by a shutdown," Buchbinder says. "For example, in 2013, the House and Senate were in a standoff over funding for the so-called Affordable Care Act and the government was shut down for 16 days during the first part of October. The S&P 500 had some down days but overall, the equity market took all the political drama in stride with a 3.1% advance during those 16 days."
It's sort of counterintuitive, but during the 21 government shutdowns, the S&P 500 rose 55% of the time, generating an average return of 0.3%, according to data from Carson Group. Even better, 12 months after the end of the shutdown, the S&P 500 was higher 86% of the time, with an average return of 12.7%.
Past performance is no guarantee of future results, but the record for stocks in government shutdowns is almost encouraging. When the last federal government shutdown ended in 2019, the S&P 500 went on to return almost 24% over the next 12 months. There are probably plenty of market participants who would take that deal again.
It's sort of counterintuitive, but during the 21 government shutdowns, the S&P 500 rose 55% of the time, generating an average return of 0.3%, according to data from Carson Group. Even better, 12 months after the end of the shutdown, the S&P 500 was higher 86% of the time, with an average return of 12.7%.
General Shutdown Information: If the government agencies close for budgetary reasons, all but "essential" personnel are furloughed and are not allowed to work. The following is an overview of how the immigration-related agencies have operated during prior shutdown periods.
'Historically, government shutdowns have not had an impact on markets' The main reason financial experts aren't worried about a shutdown is because markets have been there before and emerged unscathed. Since 1975, there have been 21 government shutdowns, which have lasted 8 days on average.
Loss of confidence in the market: If investors were unable to buy or sell stocks, it could lead to a loss of confidence in the market and a decrease in overall investor participation.
When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values.
A shutdown of a few days is a hassle—and undermines public confidence in the capacity of U.S. politicians to do the people's business—but is unlikely to have a significant impact on the economy. A prolonged shutdown, however, can cause bigger problems, albeit most temporary.
The U.S. Postal Service is not affected by a government shutdown. The U.S. Postal Service is an independent entity that is funded through the sale of its products and services, and not by tax dollars. Will I continue to receive my Social Security checks? Yes.
President Joe Biden on Saturday signed a $460 billion package of spending bills approved by the Senate in time to avoid a shutdown of many key federal agencies. The legislation's success gets lawmakers about halfway home in wrapping up their appropriations work for the 2024 budget year.
Markets tend to look through the noise and focus on the fundamental drivers – The uncertainty that a potential government shutdown introduces can lead to a short-term uptick in volatility. But as with most political events, government shutdowns have historically had little lasting impact on equity performance.
Since 1976, 10-year U.S. Treasury yields have fallen 0.59% during government shutdowns, according to Morgan Staney. The government continues making bondholder payments during shutdowns, so Treasury bond investors aren't at risk of losing their coupon payments.
Governments have the capacity to enact monetary and fiscal policy, including raising or lowering interest rates, which has a huge impact on business. They can boost currency, which temporarily lifts corporate profits and share prices, but ultimately lowers values and spikes interest rates.
Just as a high number of buyers creates value, a high number of sellers erodes value. So even though it might feel like someone is taking your money when your stock declines, the cash is simply disappearing into thin air with the popularity of the stock.
Introduction: My name is Jeremiah Abshire, I am a outstanding, kind, clever, hilarious, curious, hilarious, outstanding person who loves writing and wants to share my knowledge and understanding with you.
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