Time is running out, roughly one-fourth of the US government is on the verge of a shutdown at the end of the week as the President Trump and Democrats still have not reached an agreement over funding for the US-Mexico border wall. Despite Senate Republicans are working out several options to fund the government, Trump has not given any greenlight but instead he’d be proud to force a government shutdown if the Congress does not provide the $5 billion funding he insisted. As a result, the threat of a shutdown has sent S&P 500 down by another 2.1% on Monday after dropped by 1.2% last week.
Do Shutdowns Hurt Stock Markets?
Historically, there have been 19 shutdowns since 1976. S&P 500 was up 10 times and down 9 times, largely evenly split during the shutdown period, but it has performed much better during recent shutdowns since 1995. The median change in the S&P 500 over the course of a shutdown was 0.0%, while the average return was a decline of 0.5%. However, if we take into account for the fact that stock markets always react before the shutdown happens as well as the quick snap-back that often occurs when a budget crisis is resolved. Then, by using each period beginning 3 trading days before the shutdown and ending 3 trading days after, the adjusted median and average return for those 18 shutdowns period will be slightly improved to 0.6% and -0.2% respectively.
Both set of results show that the government shutdown only has a slight negative, but not very significant impact to stock market on average if we compared to the S&P 500 average daily gain of 0.04% since 1976. Other important observations are as follows:
- market volatility increases during the period before and after the shutdown;
- duration of the shutdowns ran from 2 days to 23 days;
- longer shutdowns have generally resulted in more pronounced decline in the S&P 500. In the six shutdowns that last more than ten days, S&P 500 was down five times out of six, with an average return of -2.9%;
- shutdown typically cut U.S. GDP by 0.3% in the year occurred according to Ned Davis Research
Figure 1. S&P Return During Government Shutdown since 1976
Source: iFund/Noble Apex, Bloomberg
All in all, we believe investors should not be overly worry about the potential shutdown at the end of this week unless it lasts into mid-January with a much bigger impact to the economy. Besides, unlike the shutdown in 2013 which occurred just ahead of a debt limit deadline. We don’t have debt limit risk for the moment as it has already suspended by the Congress through March 1, 2019.