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In One Chart - January 15, 2019

In One Chart: How This Government Shutdown Is Different… So Far

Good luck turning on your TV or checking the news online without hearing about it — Hundreds of thousands of government employees are on furlough. Republicans and Democrats are trading blame every hour. President Trump promised a wall and is threatening national emergency to get it.

The current US government shutdown is the longest ever in its 25th day, and one of only three in history to span longer than 10 days; the previous record long, 21 days, occurred in 1995–96 under President Clinton, and the third longest, 16 days, was in 2013 under President Obama.

But regardless of your opinions on the shutdown, its merits or its implications, it’s important to stay aware of its ramifications on your investments.

While this shutdown is the longest (and one of the most expensive, reportedly costing the US government $1.2 billion in GDP every week) it has actually been one of the best for the stock market.

Historically, the stock market has been almost perfectly agnostic to government shutdowns. In December, LPL Financial released a study that showed “going back nearly 40 years, the median return during shutdowns has been exactly flat.” Further, the average movement during a shutdown was a marginal -0.6%.

Even more, the S&P 500 (^SPX), Dow Jones (^DJI), and Nasdaq (^IXIC) are in the midst of their best start to a calendar year since 2006. The chart below shows these three major indices’ performance since the start of the current shutdown on December 22, 2018 — all three have posted solid gains.

(Okay. Before we go any further, we lied. This story cannot be told “In One Chart”. We’re going to need more. Three to be exact.)

The next chart shows the performance of the S&P 500, Dow Jones, and Nasdaq during the second-longest government shutdown, spanning December 16, 1995 to January 6, 1996. All three indices were nearly flat over the 21 days.

The final chart below again plots the S&P 500, Dow Jones, and Nasdaq during the government shutdown of 2013, which ran for 16 days from October 1–16, 2013. The major indices went slightly higher this time.

The three charts above show just how unique the current shutdown is. For example, the Nasdaq has gained 10.21% since the stalemate in Washington began. During the 1995–96 shutdown the Nasdaq returned only 0.29% and during that of 2013, only 0.56%. The story is the same for the S&P and Dow.

There are a few circumstances that do in fact make this shutdown a little different. First, investors’ fears about a trade war with China have been calmed as recent meetings in Beijing have seemed to go quite well. The beginning of the shutdown also corresponded with a historic market turnaround, with the markets going almost straight up since bottoming out on Christmas Eve.

The table below illustrates how the market has performed in the three months leading into, during, and three months following the longest government shutdowns.

*As of this post, the government shutdown of 2018–19 is still ongoing

One commonality between the three longest shutdowns has been the markets’ initial reaction. It’s as if investors say: “Oh no. A government shutdown will be bad, I better sell.” Then we all look at each other after a couple of days and think: “Wait, nothing has changed. Netflix is still streaming and Amazon is still shipping. This isn’t so bad after all.”

The 90-day periods following the two previous major shutdowns have shown positives for the market. As the current shutdown drags on (or finally ends), we’ll see just how similarly, or differently, the market behaves.

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