Markets have, for the most part, been resilient — but the longer the shutdown goes on, the greater the chances that stocks will drop
Kent Nishimura
Stocks were lower in early trading Wednesday following the shutdown of the federal government. That was an expected reaction. What many investors are wondering, though, is what will happen if the stalemate between Republicans and Democrats continues for an extended period.
Historically, there hasn't been a clear relationship between a government shutdown and market performance. Since 1976, the federal government has been closed 21 times, not counting this most recent closure. In some instances, that saw the S&P 500 lose ground, but since 1995, the markets have managed to grow stronger whenever the government was closed.
"Although there can be market volatility during a shutdown, history reveals no clear relationship between shutdowns and market returns," said Vanguard's Jeremy Eisengrein. "Markets might experience heightened volatility in response to the uncertainty in Washington. However, markets have historically had mixed reactions to government shutdowns, with equities finishing in positive territory more than half the time."
The longer most previous shutdowns have lasted, however, the more Wall Street has typically taken notice. A 10-day closure in 1976 saw the S&P fall 3.4%. And an 11-day shutdown in 1979 saw a 4.4% decline.
There are notable exceptions to that rule, though. During the 35-day shutdown that occurred during Trump's first term in 2018-2019, the S&P spiked 9.3%.
Here's a look at how the S&P has performed in government shutdowns since 1976:
Sept. 30 - Oct. 11, 1976
Length: 10 days
Change in S&P Index: -3.4%
Sept. 30 – Oct 113, 1977
Length: 12 days
Change in S&P Index: -3.2%
Oct. 31-Nov. 9, 1977
Length:8 days
Change in S&P Index: +0.7%
Nov. 30 – Dec. 9, 1977
Length: 8 days
Change in S&P Index: -1.2%
Sept. 30 – Oct. 18, 1978
Length: 17 days
Change in S&P Index: -2%
Sept. 30 – Oct. 12, 1979
Length: 11 days
Change in S&P Index: -4.4%
Nov. 20 – Nov. 23, 1981
Length: 2 days
Change in S&P Index:-0.1%
Sept. 30 – Oct. 2, 1982
Length: 1 day
Change in S&P Index: +1.3%
Dec. 17 -Dec. 21, 1982
Length: 3 days
Change in S&P Index: +0.8%
Nov. 10 – Nov. 14, 1983
Length: 3 days
Change in S&P Index: +1.3%
Sept. 30 – Oct. 3, 1984
Length: 2 days
Change in S&P Index: -2.2%
Oct. 3 – Oct. 5, 1984
Length: 1 day
Change in S&P Index: +0.1%
Oct. 16 – Oct. 18, 1986
Length: 1 day
Change in S&P Index: -0.3%
Dec. 18 – Dec. 20, 1987
Length: 1 day
Change in S&P Index: +2.5%
Oct. 5 – Oct. 9, 1990
Length:3 days
Change in S&P Index: -2.1%
Nov. 13 – Nov. 19, 1995
Length: 5 days
Change in S&P Index: +1.3%
Dec. 15, 1995 – Jan. 6, 1996
Length: 21 days
Change in S&P Index:+0.1%
Sept. 30 – Oct. 17, 2013
Length: 16 days
Change in S&P Index: +3.1%
Jan. 19 – Jan. 22, 2018
Length:2 days
Change in S&P Index: +0.8%
Feb 9 – Feb. 9, 2018
Length: 0 full days
Change in S&P Index: n/a
Dec. 21, 2018 – Jan. 25, 2019
Length: 35 days
Change in S&P Index: +9.3%
As any investor will tell you, though, past performance is not indicative of future results. The 2018 surge, for instance, was largely driven by the Federal Reserve becoming more dovish on interest rates.
The current economic landscape is much more volatile than the conditions of other shutdowns. The lack of a fully functional federal government could exacerbate that.
“Unlike in President Trump’s first term, the economic backdrop is much weaker entering this potential shutdown fight with a labor market that has been weakening over the last six months at the fastest rate since 2007, outside of the pandemic," wrote Deutsche Bank's Karthik Nagalingam in a note last week. “Therefore, a negative shock could prove more detrimental."
Government shut downs aren't the rarity they were several years ago, though. So some investment houses are telling clients to remain calm and continue looking at the longer picture.
"Political divisions in Washington have made the threat of government shutdowns more common in recent years," said Eisengrein. "Although this is not an ideal practice and a prolonged shutdown could have broader short-term market and economic effects, what’s most important is that investors remain disciplined, diversified, and patient during such an event."
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