Study: government shutdowns are slightly bearish for stocks


The U.S. government is constantly in peril of shutting down over political bickering. Historically speaking, government shutdowns have been slightly bearish for the U.S. stock market. Here are the historical dates and how much the S&P 500 fell during these government shutdowns.

  1. September 30 – October 11, 1976: -3.4%
  2. September 30 – October 13, 1977: -3.2%
  3. October 31 – November 9, 1977: 0.7%
  4. November 30 – December 9, 1977: -1.2%
  5. September 30 – October 18, 1978: -2.4%
  6. September 30 – October 12, 1979: -4.4%
  7. November 20 – November 23, 1981: -0.1%
  8. September 30 – October 2, 1982: 1.3%
  9. December 17 – December 21, 1982: 0.8%
  10. November 10 – November 14, 1983: 1.3%
  11. September 30 – October 5, 1984: -2.1%
  12. October 16 – October 18, 1986: -1.5%
  13. December 18 – December 20, 1987: 0.2%
  14. October 5 – October 9, 1990: -2.1%
  15. November 13 – November 19, 1995: 0.8%
  16. December 15, 1995 – January 6, 1996: 0.3%
  17. September 30 – October 16, 2013: 2.4%

Out of these 17 cases, the S&P fell in 9 cases and went up in 8 cases. It fell an average of -0.7%, while the median was -0.1 (a few cases skewed the average). Let’s look at these cases individually.

September 30 – October 11, 1976

The S&P was in the beginning of a “significant correction”. This historical case does not apply to today because the Medium-Long Term Model doesn’t foresee a significant correction right now.

September 30 – October 13, 1977

Like the previous historical case, this doesn’t apply to the present day either because this was a “significant correction”.

October 31 – November 9, 1977

Like the previous historical case, this doesn’t apply to the present day either because this was a “significant correction”.

November 30 – December 9, 1977

Like the previous historical case, this doesn’t apply to the present day either because this was a “significant correction”.

September 30 – October 18, 1978

The S&P was in the middle of a 15.1% “significant correction”. This case doesn’t apply to today because we are not in a significant correction right now.

September 30 – October 12, 1979

The S&P’s next 11.6% “small correction” began 1 week later in October.

November 20 – November 23, 1981

The S&P was in the middle of a 28% “significant correction”. This historical case doesn’t apply to today because we are not in a significant correction right now.

September 30 – October 2, 1982

The S&P began a 6.3% “small correction” 2 weeks later.

December 17 – December 21, 1982

The S&P began a 6.2% small correction 3 weeks later.

November 10 – November 14, 1983

The S&P was in the beginning of a 14.7% “significant correction”. This historical case doesn’t apply to today because the S&P 500 is making new highs right now.

September 30 – October 5, 1984

The S&P’s next 8.4% small correction began more than 9 months later in July 1985.

October 16 – October 18, 1986

The next 9.2% “small correction” began almost half a year later in April 1987.

December 18 – December 20, 1987

The next 8.2% “small correction” began 3 weeks later in January 1988.

October 5 – October 9, 1990

This government shutdown occurred at the very bottom of a 20.3% “significant correction”. This case does not apply to today because we are not at the very bottom of a significant correction – the S&P is making new highs right now.

November 13 – November 19, 1995

The S&P began a 6% correction 3 months later in February 1996.

December 15, 1995 – January 6, 1996

The S&P began a 6% correction 2 months later in February 1996.

September 30 – October 16, 2013

The S&P began a 6.1% “small correction” 3 months later in January 2014.

Conclusion

Most of the bearish cases happened when the S&P was already in a “significant correction”. Those cases do not apply to today because the S&P is making new all-time highs!
Government shutdowns have no meaningfully consistent impact on the U.S. stock market. Sometimes government shutdowns occurred in the middle of significant corrections and sometimes they occurred in the middle of rallies (with the next correction still months away). So historically speaking, government shutdowns aren’t bearish for stocks. They’re mostly irrelevant to the stock market.
But this time could be different. Perhaps a government shutdown will trigger a 6%+ “small correction” in the S&P 500. The S&P’s current rally is extremely dated. Thus, any trigger that normally can’t bring the S&P down might bring it down now.

8 comments add yours

  1. Hello,
    When your conclusion itself was – ” …. Government shutdowns have no consistent impact on the U.S. stock market. “, why does the headline of the article states otherwise.
    Thank you.

    • Hi Praveen,
      Noted. The conclusion should be “no meaningfully consistent impact on the stock market”. -0.7% is not meaningful.

    • I agree that the USD is going down. But I disagree with his implications.
      I believe it’s inflation that ultimately drives the dollar lower & rates higher. Inflation is caused by natural forces in the economy. Clearly QE did not impact inflation. Instead, QE created asset bubbles.

  2. Troy, watching the es on a 5 minute chart 24/6. I noticed once price reached 2804-2809 2 -3 hours before close that the majority of traders were stuck short because of the sentiment of the gov’t shutdown and there would be a very high probability of new highs reached (stuck shorts covering) into the final minutes of close.
    – seems like the market try’s to trade on the opposite side of sentiment shifts once above certain price support/resistance zones. Also, isn’t the market traded and valued on corporate earnings and not by gov’t budgets/legislation?
    – also do you have studies on when large institutions do most of there buying? Like time of day/day of week/ week of month? Is there any trends or information on when institutions/pension funds buy large blocks of stock or index funds like beginning of the week, middle, end or beginning of qtr?. pre market, on open, middle of the day, end of day? I know the Norwegian institutional fund is the largest in the world. Information on inflow buying like this could aid in the help of decision making for the liquidity speculater day trader at home.

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