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Will the Government Shutdown Have an Effect on the Market?

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As most of you probably know by now, since December 21, the US government has been operating under what is best described as a partial shutdown. Now, the reason it’s only a partial shutdown is because once a fiscal yearly budget is passed by Congress, usually at the end of each September, they must then pass 12 separate appropriations bills to allocate that budget among the different departments. Now, in December only 5 of those bills covering about 70% of the government were passed, leaving the remaining 30% covered by the other 7 bills unfunded going into 2019. Essentially, funding for these departments is being held up due to a partisan dispute over funding for a border wall between the US and Mexico.  

Now, last week President Trump said that he was willing to leave parts of the government closed for “months or even years”, so this shutdown could go on for a while longer. Now since a government shutdown could result in government employees or contractors losing their jobs, you might wonder if it would spill over into weekly unemployment claims, which are currently just above 48-year lows.

So, what I did, is I took a look at the trend in claims following all previous shutdowns that exceeded a week. Now, that’s the minimum time required before you can file for unemployment claims. And what I found was that in some cases, there did appear to be a small spike after each shutdown, but that spike was really no larger than those seen at other times, and it usually reversed itself within a few weeks after the shutdown ended. So, it was impossible to know if any of those spikes were related to the shutdown or if they were just statistical noise.

But rather than go into any more detail about economics or the political process, what I’d like to do is focus on how this shutdown might impact the markets, and you as an investor. We all know that past performance is no guarantee of future results, but historically government shutdowns have not typically had a strong negative impact on the stock market. In Fact, since 1976, when the current appropriations process was enacted, there have been 18 government shutdowns, and only half of them actually resulted in any downturn in the stock market.

And among those downturns, the worst one, back in 1979, resulted in a loss of only 4.4%.  During the other 9 shutdowns, the market actually went up. And among those gains, the largest one, back in 2013, resulted in a gain of 2.4%

Historically, government shutdowns haven’t lasted very long either. In fact, 9 of the past shutdowns have lasted less than a week. The rest, including the current one, have lasted longer than a week.

Now as a market analyst I think it always makes sense to pay the most attention to the most recent data. And that’s why I think it’s important that all 4 of the last 4 shutdowns resulted in market gains.

So, this leads me to my final point. How does the current shutdown stack up against the other 18? First, don’t forget, this is only a partial shutdown, so it is just a little bit different than the others. But as of January 8, the current shutdown has been the most bullish in history with a gain of more than 5%.

Keep in mind, there are many factors influencing the market right now, such as the trade war with China, interest rates, the Brexit issue, the Mueller investigation, even concerns about slowing economic growth, but all of those are topics for another time. As I said previously, past performance is no guarantee of future results, but if history can provide even a rough roadmap, it’s reasonable to assume that unless the current shutdown drags on significantly longer than any previous shutdown, it’s unlikely to be a major drag on the market.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

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Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

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