Opinion: Government shutdown is nothing for investors to fear
By Mark Hulbert
Published: Apr 7, 2017 7:48 a.m. ET
Stocks have performed well during previous freezes
Might the source of the stock market's recent struggles be a possible federal government shutdown later this month?
Up until just a few weeks ago, of course, such a shutdown seemed remote. With both houses of Congress and the presidency controlled by the same political party, it seemed a shoo-in that a spending bill would be passed and signed into law by when the current spending bill expires on April 28.
But Congress' failure so far to repeal and replace Obamacare has altered that calculus. Investors realize that, complex as health care reform is, the federal budget is much more so. That in turn means there's a real possibility that a spending bill will not get passed in time. PredictIt.org, the on-line betting site, places the odds of a shutdown by May 1 at better than one-in-five.
The U.S. is the largest health-care spender in the world, but that doesn't actually translate into better health outcomes for Americans. Dr. Clay Johnston, Dean of the Dell Medical School at The University of Texas at Austin, explains why.
I'll leave to political commentators an assessment of what that would mean for the country. But, from an investor's point of view, I'm not so sure that a shutdown is something to lose much sleep over. That's because, during past government shutdowns, the stock market actually performed quite well.
This is evident in the chart below, which plots the U.S. stock market's average performance during the three government shutdowns that have occurred since 1995. On average, the stock market rose 1.4% during those times, which compares favorably to the 0.4% average gain across all other periods of comparable length.
To test whether the market suffered in advance of those shutdowns, I also measured equities' returns over the prior one- and three-month time frame. Once again, I found that the stock market did better than average.
To be sure, robust statistical conclusions can't be drawn from a sample containing just three instances. So it's inappropriate to confidently forecast that equities will rise once again if the government does indeed shut down. But what the data do show is that a shutdown doesn't have to lead to stock market weakness.
Some of you may wonder why I chose 1995 as the beginning point of my analysis. I did so because shutdowns that occurred prior to then are of limited relevance to today:
- There were five shutdowns during President Jimmy Carter's presidency, but they affected just two cabinet departments — Labor and Health, Education, and Welfare.
- There were eight more shutdowns during the Ronald Reagan years, but they were short: None lasted more than three days, for example, with many of them occurring over a weekend.
- Finally, the George H.W. Bush administration also experienced a weekend shutdown.
The bottom line? There no doubt are plenty of things for investors to worry about. But a possible government shutdown should not be at the top of their list.
Posted by: sarah_oz@yahoo.com
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