While shutdowns of the U.S. federal government typically induce anxiety among investors, sharp gains in stock prices often follow. "Past shutdowns have largely been a nonevent for the U.S. economy and stocks," according to research by LPL Financial. "Business and consumer confidence indicators usually decline and government spending drops during a shutdown, but any losses have typically been recouped quickly," their report continues.
The current shutdown is the 20th since 1976. In the 12 months following the end of 18 previous shutdowns, the S&P 500 Index (SPX) enjoyed an average gain of 13.0% (see table below for the five biggest rallies). The one-day shutdown that ended on Feb. 9, 2018 is not included in the analysis since less than 12 months have passed since then.
5 Biggest 12-Month Gains After Shutdowns
- 36.2% after shutdown ending Oct. 2, 1982
- 24.7% after shutdown ending Oct. 12, 1979
- 23.5% after shutdown ending Oct. 9, 1990
- 22.8% after shutdown ending Nov. 19, 1995
- 21.3% after shutdown ending Jan. 6, 1996
Source: LPL Financial
Significance for Investors
Since the current shutdown began at midnight on Dec. 22, 2018, the S&P 500 has jumped by 8.9%. However, this is by far the longest shutdown to date, having run for 32 days through Jan. 22, 2019. The previous longest was 21 days, ending Jan. 6, 1996, during which time the S&P 500 posted a slim 0.1% gain.
"The current shutdown has lasted for an unprecedented amount of time with no end in sight. The U.S. economy is also especially sensitive to a shift in confidence right now. Consumer and business confidence gauges have declined from cycle highs recently," LPL warns. Partly because U.S. federal employees missed their first payday of 2019 on Jan. 11, "the shutdown eventually could weigh on consumer demand," says John Lynch, chief investment strategist at LPL Financial Research.
"The market historically has shrugged off govt. shutdowns, but the risks to the economy/market grow as time goes on," as Bank of America Merrill Lynch observes in a recent Strategy Snippet. Their economists estimate that the U.S. GDP growth rate falls by 0.1 percentage point for every two weeks that the shutdown continues.
Moreover, the current budget impasse may lead to an even bigger fight between President Trump and Democrats in Congress over the federal debt ceiling, says David Woo, head of global interest rate and foreign exchange strategy at BofAML. He sees increased the risk that the U.S. may default on its debt service during the summer.
In only two of 18 instances since 1976 did the S&P 500 fall in the 12 months after a shutdown concluded. These were drops of 6.6% after the shutdown that ran to Oct. 11, 1976 and 0.4% after the closure that ceased on Nov. 14, 1983. As noted above, a full 12 months have not passed since the 19th shutdown ended in Feb. 2018.
While the 19 previous shutdowns were underway, the S&P 500 rose nine times and fell 10 times, with the average result being a decline of 0.4%.The biggest previous gain was 2.3% during the 17-day shutdown that ended Oct. 17, 2013. The most severe prior pullback was a 4.4% decline during the 13-day closure that ended Oct. 12, 1979.
Given the unprecedented length of the current shutdown, history may not be a useful guide to the probable future direction of stock prices. The outlook may be bearish if it proves to have a significant negative impact on GDP, or if it makes reaching a timely deal on the debt ceiling more difficult.