What a Government Shutdown Means for Your Stocks

“There will be blood.”

So warns Beth Ann Bovino.

Bovino is the chief economic forecaster for Standard & Poor’s (S&P) Rating Services.

She’s spent more than a decade doing economic and market research for Sungard Institutional Brokerage, UBS Warburg, and the Federal Reserve.

Last week, Bovino sounded the alarm. Here’s why…

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President Trump threatened to shut down the federal government if he doesn’t get funding for his Mexico border wall.

Bovino said a shutdown would be “more catastrophic to the economy than the 2008 failure of Lehman Brothers.”

She’s hardly alone…

You’d think those forecasting doom and gloom would look to the past first.

Maybe they’d realize that government shutdowns don’t hurt the markets.

At the Daily, we’re contrarians. We don’t follow the mainstream press because they’re often wrong.

We did some digging. And here’s how the stock market fared during the last two major government shutdowns…

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Art of the Deal?

A government shutdown happens when Congress fails to pass a spending bill. With no money, the government discontinues “non-essential” services.

(Essential services include police, firefighting, armed forces, utilities, and prisons.)

Listening to market pundits, you’d think the economy would go to hell in a handbasket whenever the government shuts down.

And now they’re really in a frenzy. President Trump threatened to shut down the government in October if he didn’t get funding for his wall.

He backed off that threat to allow Congress time to pass a short-term spending bill in September. But now he’s giving lawmakers a December deadline.

Is this a bargaining chip as he works the art of the deal? We don’t know, but another “crisis” is right around the corner.

Bovino and other market forecasters say the market would tank if Congress doesn’t fund the wall and Trump follows through on his threat.

So should you sell all your stocks before a shutdown and buy them back in a month?

No. That’d be a bad decision. Here’s why…

There have been two major government shutdowns over the past 20 years.

In 1995, there were two government shutdowns: A five-day shutdown in November, followed by the longest shutdown ever—21 days from December 1995 to January 1996.

And in 2013, there was 15-day shutdown in October.

Look at the chart from 1995–1996…

The shutdowns were barely a blip on the chart. The largest pullback during that time was 2.5%.

And what about the “devastating” government shutdown in 2013?

We had a “crushing” 3% pullback before the market recovered in a week and rose higher.

Those are the two longest government shutdowns in history. And the markets went up during each one.

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Don’t Fear the Shutdown

Next time someone tries telling you the market will crash if the government shuts down, ask them for proof.

These fear-mongering articles don’t have any. They’re just what the pundits think will happen.

But we don’t like to take someone’s opinion. We like to look at the evidence—what’s happened in the past.

And the evidence says that a government shutdown is nothing to fear.

Keep holding your stocks. A shutdown is not a reason to change your whole investment plan.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

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