Rumble in DC!

david —  October 2, 2013

So the government is shut down (as of this writing) and the market is not tanking.  This may seem confusing confusing however a look at history sheds some light on events.  This is the 12th time that a congressional standoff has shut down the government and the first time in 17 years.  According to Bloomberg: it is a buying opportunity for stock investors, if history is any guide.  The Standard & Poor’s 500 Index has risen 11 percent on average in the 12 months following a government shutdown, according to data compiled by Bloomberg on the 12 instances since 1976. That compares with an average return of 9 percent over 12 months. In all the cases, the U.S. equity benchmark was higher by the end of the next two years.      The last time there was speculation about a U.S. government shutdown was in August 2011, when the S&P 500 fell more than 11 percent in three days. Stocks tumbled during the stalemate between President Barack Obama and Congress over whether to raise the debt ceiling and S&P stripped the U.S. of its AAA credit rating that month.  The losses were later reversed, as the Federal Reserve pledged to hold the benchmark interest rate near zero and maintain bond purchases to support the economy. The S&P 500 gained 25 percent in the 12 months through August 2012.  In the last actual government shutdown that started in December 1995, the S&P 500 rallied 21 percent in the following year, according to data compiled by Bloomberg. The U.S. equity benchmark was up 36 percent in the 12 months after a one-day closure in 1982.

Shorter term the stock market has tended to struggle prior to and during the initial three days following a government shutdown. Following this, the stock market has (on average) trended higher over the ensuing three months. Chart of the Day postulates that…. explanation for this particular average pattern is that the market abhors uncertainty. So as the shutdown approaches, investors fear for the worst. However, after the shutdown begins and investors notice that the economy continues to function coupled with the fact that the shutdown may be short-lived ultimately encourages a stock market rally as investors worst fears are not realized.

In short the government shutdown dance that politicians play bring out classic fear responses in many investors but doesn’t do anything that changes the value of stocks for the mid and long term.  Hopefully this knowledge will help you avoid emotion based decisions at this time.

As always please call me if you have any questions.