Federal government shutdowns aren't necessarily all that bearish for stocks, at least historically speaking.
Although the market hates the threat of a federal government shutdown – an outcome that looks increasingly likely beginning November 17 – the S&P 500's performance during actual shutdowns has been pretty good.
If our current go-round with a shutdown seems particularly unwelcome, it's probably because of its especially poor timing. The remarkable rally of 2023 has finally regained momentum after a rough couple of months. Mounting anxieties over interest rates, bond yields and oil prices, to name just three, caused the broader market to shed 2.2% in October alone.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
November, however, has been another story entirely, with the S&P 500 jumping more than 5% for the month-to-date through November 9.
Throwing a potential government shutdown into the mix when markets are rallying during a seasonally strong month of the year for equities is less than ideal. After all, stocks are back on track for a fourth-quarter push. A government shutdown would only mess with success.
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. 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.
Related Content
-
Alaska Airlines to Buy Hawaiian: Get Bonus Miles NowHow to use the Alaska Airlines credit card and frequent flyer program to save on trips to Hawaii, Alaska and beyond.
-
11 Reasons to Consider a 1031 Exchange
Deferring capital gains taxes might be at the top of the list, but growing your portfolio and your wealth and helping with estate planning are also compelling reasons.
