Since 1976, there have been nine government shutdowns that lasted at least one week
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This past week kicked off with fears of another looming government shutdown, as Democrats and Republicans remained at an impasse regarding federal budget updates. Even though AI valuation concerns and lagging semiconductor stocks did their best to overshadow the drama, the Sept. 30 budget deadline will likely bring added stress to the end of the third quarter. To add fuel to the fire, Wednesday, the Trump administration asked federal agencies to look toward bulk firing in the event of a shutdown, with hopes to add pressure against Democrats.
Despite a record close Monday, the S&P 500 Index (SPX) is heading for its first weekly loss of September. Can a macro event like a government shutdown lend any quantifiable data that could help investors start the fourth quarter on the right foot?
Historically speaking, there are partial and full government shutdowns, but for the purpose of this study, we’ll be looking at both types and closures that lasted at least a week. Since 1976, there have been nine occurrences, with the first recorded Sept. 30, 1976 and the most recent Dec. 22, 2018.
Per data from Schaeffer’s Senior Quantitative Analyst Rocky White, stocks have done poorly after the government shutdown starts -- up to one month out. The last shutdown was an exception, however. The SPX gained over 9% in the month after it started, with a healthy 6-month gain of 20.7% on the books. The table on the right shows how the SPX did during the shutdown from the start date to the end date, also indicating a broader underperformance during shutdowns, including steep returns of -4.4%, -2.6%, and -3.4%. Even when averaging out the 2018 shutdown’s outperformance, the median return sits in the red 1.2%.
The worst data point for the benchmark one-month out was the 1995 occurrence, which dragged the index nearly 7.9%. A drop of this magnitude from the S&P 500’s current perch near 6,640 would put shares near 6,115 -- levels not seen since early June. Even if the equity recovered these losses six months out like in 1995, the damage of nearly three months’ worth of gains would still be shed by this time next month.
President Trump was under scrutiny for canceling a pre-schedule meeting with Democrats this past week, allegedly skirting "unserious and ridiculous" demands. The closer we get to the deadline without progress, the more volatile the game investing will be. The dormant Cboe Volatility Index (VIX) will hopefully be a flare for investors, but keep in mind the market’s history for resiliency lately. The SPX finished the week strong, after the personal consumption expenditures (PCE) price index August reading -- which matched estimates -- overshadowed another round of tariffs from the Trump administration. If stocks can withstand some short-term chop, the long-term data is a feather in the cap for steadfast bulls.