Shut down thoughts

Posted by on Jan 23, 2018

The media is filled with speculation about effect of the Federal government shutdown on the stock market. Many worry about headlines that could put an end to the rally.

Neither worrying about this government shutdown nor past shutdowns themselves are unique experiences for stock investors. Historically speaking, the market doesn’t seem to care about whether Washington shows up for work as no recession or bear market had ever begun with, or was due to, a government shutdown.

Politics usually don’t matter all that much to the stock market. It’s economic news and corporate earnings that ultimately drive stock prices.

According to LPL Financial and FactSet, we’ve had 18 government shutdowns since 1976. They’ve ranged in length from one to 21 days. During those periods, there was an average loss for the S&P 500 of a whole 0.6%. Even the worst loss period, from September to October 1979, was a mere 4.4%. In that instance, the market made that back by the start of 1980. In the most recent closure, which lasted for 16 days in 2013, the S&P 500 actually gained 3.1%.

That shutdown in October 2013 did shave about half a percentage point off fourth-quarter economic growth that year, according to separate estimates from JPMorgan Chase and Moody’s Analytics.

 

“The market has seen this before, and while the short-term reaction is unpredictable, it tends to be short-lived,” says Oliver Pursche, chief market strategist at Bruderman Asset Management.

Seems to me that, as it typically does with news that is generally known, markets might already have priced this into prices. Either way, what matters for stock investors isn’t what happens over just the next few weeks. Markets move most on events that are from 3 to 30 months out…not 3-30 days.

To put it another way, whether the government shuts down for a while shouldn’t meaningfully hit corporate profitability over the next one, two, three or more years. This is probably why none of the other 18 shutdowns since 1976 brought a meaningful downturn. Returns during the shutdowns themselves can vary, but returns afterward, much more often than not, have been positive.

Let’s consider some facts. Federal government spending and investment is just 6.7% of GDP and a short-lived shutdown will not wipe all of this out. While the federal government employs over 2.8 million people, this includes over 600,000 employees of the US Postal Service—they aren’t furloughed in a shutdown. Other “essential” government employees will also continue getting paid.

Those who do get some unwanted time off will probably receive their back pay once they’re back at work. That’s a way of saying the impact on consumer spending should be negligible.

More importantly, over 80% of US economic activity occurs in the private sector, where shutdowns have little influence. Markets are very much global today and the US market represents less than one-fourth of the global economy. They’ve grown – we didn’t shrink. Safe to say, a US government shutdown means next to nothing for firms in Europe and Asia.

Look past any short-term normal sentiment-driven wobbles or wiggles and stay focused on the longer term.

 

A month after a shutdown, the S&P 500 has averaged a return of 2.1 percent and traded positive 80 percent of the time. “Anyone with capital markets experience knows that US government shutdowns are largely meaningless in the context of financial asset values,” said Nicholas Colas, co-founder of DataTrek Research.

“The prospect of a government shutdown isn’t putting a lid on this boiling market—investors simply aren’t the least bit fazed,” said Mike Loewengart, vice president of investment strategy at E-Trade.

In summary, we expect any short-term volatility tied to this to pass quickly because stocks have been very good at moving on from shutdowns. This shutdown likely will have little effect on the stock market, corporate earnings and long-term economic growth, based on previous similar events.