Why Stocks May Yawn If The Government Shuts Down
Posted: December 18, 2018
If the federal government shuts down, will the stock market care?
There have been 19 shutdowns since 1976. I’ve analyzed U.S. stock market returns for 19 periods, each beginning a week before the shutdown and ending a week after. During these periods, stocks achieved a return of about 1.51%. That works out to an average return of about 0.2% per day, which is well above average.
Stocks were up 10 times and down 9 times during the shutdown periods, as I defined them. I included the week preceding because rumors of a pending event often affect the market. I included the week after to take into account the quick snap-back that often occurs when a budget crisis is resolved.
I like my methodology, but if you prefer to know what happens only during the actual days the government is put to sleep, others have already calculated that. One study of 18 shutdowns by LPL Financial found an average decline of 0.6%
Conclusion: Investors won’t leap for joy if last-minute budget negotiations fail, but they won’t dissolve in tears either.
Where It Hurts
If the market doesn’t much care, the economy does–to an extent.
A study by Ned Davis Research, published on January 22, 2018, found that the typical shutdown hurt gross domestic product (GDP) by 0.3% in the year it occurred. Among the causes:
- Delays in mortgage and other loan processing.
- Delayed payment of Social Security and Medicare benefits.
- Loss of consumer and business confidence.
- Delayed processing of passports and visas.
That last point brings back a strong personal memory for me. In 1995, during what proved to be a 23-day shutdown, my fiancé (now wife) and I planned to take a trip to London.
With government offices shut down, she couldn’t renew her passport. We decided to go to Santa Fe, New Mexico, instead. While there, we wanted to visit a famous national park. Unfortunately, the national parks were closed.
We didn’t know if we would ever be back in Santa Fe, so we decided to engage in mild civil disobedience and go there anyway. We were about a mile into the park when a park ranger (apparently one of the few not furloughed) approached us on skis and arrested us.
I’ve always regretted not seeing more of that magnificent place. But the incident did have one tiny benefit. It enabled me to ask the ranger, “Sir, what is the penalty for walking in the park?”
Shutdown Lore
My little study yielded a few other findings. There were eight shutdowns during the administration of Ronald Reagan, five under Jimmy Carter, two under Bill Clinton, and one each under Gerald Ford, George H.W. Bush, and Barack Obama.
Under President Trump, there was a three-day shutdown (Saturday to Monday) from January 20 to January 22, 2018. A second one may or may not begin this Friday, December 21. The main issue: funding for the wall that President Trump proposed between the U.S. and Mexico.
Duration of the shutdowns ran from two days to 23 days. The average was 7.6 days.
In the six shutdowns that lasted more than ten days, the market (as measured by the Standard & Poor’s 500 Index) was down five times out of six. The average decline was 2.92% in the shutdown period, including the shutdown itself and the seven days on each side.
So, from a stock-market point of view, longer is worse, but still not catastrophic.
Why It’s Partial
You’ve probably noticed that news coverage refers to the potentially imminent shutdown as a “partial” one. Some “essential” services would continue, such as border patrol, customs, Amtrak and air traffic control.
Some shutdowns can affect the military, but not this one–at least not directly. The armed forces have already been funded under an authorization passed this fall.
Blame Game
If there is one thing Washington enjoys more than governing, it is political infighting.
The shutdown, should it occur as threatened this Friday, would certainly aggravate the always-acute tension between Republicans and Democrats, both in Congress and among the general public.
I can’t prove it statistically, but I believe that the ceaseless bickering between the two major parties is hurting the country and the economy by making it hard for Congress to function effectively.
I realize that there is a school of thought that the best Congress is a do-nothing Congress. However, that’s not what I believe.
History is a decent guide, but it’s only a rough one. A government shutdown probably won’t scar the stock market. But as with surgery, there’s always the risk of a bad outcome.
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John Dorfman is chairman of Dorfman Value Investments LLC, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.