The Investment Scientist

Government Shutdown and Stock Returns

Posted on: October 2, 2013

There have been 17 government shutdowns in history. Today I asked my intern Taro Taguchi to analyze the market performances subsequent to shutdowns.

Using the closing price prior to the day of government shutdown as a base line, he found on average, the market rose 0.97% in one month, 2.38% in three months and 13.42% in a year.

If we isolate the 5 most severe shutdowns that lasted more than 10 days, the picture is a bit worse, but not by much. On average the market fell 4.19% in one month, fell .18% in three months and rose 9.63% in a year.

These historical precedents confirm my gut feeling that a government shutdown is really no big deal, as far as the market is concerned.

More worrisome is the upcoming debt ceiling fight. There is no precedent of US default to guide my outlook on this, but the longer the government shutdown lasts, the deeper heels get dug in by both parties and the more likely a default. Nevertheless, I’m still thinking that will also be a storm in a tea cup.

The bottom line is these are issues beyond our control, there is no point worrying about them. If worst comes to worst (ie default,) and the market should drop 20%. That’s actually great because then we can buy shares at a discount!

4 Responses to "Government Shutdown and Stock Returns"

If the market drops, I intend to rebalance. (Though I might have to pull out some cash to cover bills.)

Are you working for the government too? I know a few government worker friends who are paycheck to paycheck.

Yes, furloughed government basic science researcher, but we’re lucky. My wife is working, and we have an emergency fund. We have not been living ‘paycheck to paycheck’ for a long time. I always think about ‘worst case’ scenarios and my wife makes me think about the good side, i.e. I’m a number-crunching pessimist who married a beautiful and talented optimist. Come to think of it, that makes me luckier than I deserve, regardless of finances. 🙂

Yes you are.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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