Weekly Update
So far minimal damage to stocks from government shutdown
The partial government shutdown that began last Tuesday has had little impact on stocks so far. The Dow Jones Industrials Average, which represents 30-large companies, fell 1.2% last week. But the broader S&P 500 Index, made up of 500 larger firms, fell a scant 1.25 points to 1690.50, or just 0.1% last week.
Historically, stocks have done a fairly decent job weathering any storms clouds blown in by the uncertainty that surrounds a cessation of non-essential government services. This week we wanted to break down each of the 17 government shutdowns since 1976 and highlight the performance of the S&P 500 Index during the closure as well has how the index behaved one-year later.
As you can see from the chart below, the uncertainty generated by lengthier closures had a more pronounced impact, but nothing that might be considered extraordinary. The most recent shutdown in the mid-1990s (technically two events) saw the market rise, while a 4.4% decline registered in 1979 was the weakest showing. In most cases, stocks performed admirably within one year. One cautionary note: an extended government shutdown could create a temporary but modest drag on a recovery that has been weak by historical standards.
S&P 500 performance during/after govt shutdowns
| Date of Govt Shutdowns | Length |
During |
1-Year Later |
| Sep 30 to Oct 11, 1976 | 10 days |
-3.4% |
-5.8% |
| Sep 30 to Oct 13, 1977 | 12 days |
-3.2% |
+12.2% |
| Oct 31 to Nov 9, 1977 | 8 days |
+0.7% |
+1.6% |
| Nov 30 to Dec 9, 1977 | 8 days |
-1.2% |
+3.2% |
| Sep 30 to Oct 18, 1978 | 17 days |
-2.0% |
+2.9% |
| Sep 30 to Oct 12, 1979 | 11 days |
-4.4% |
+24.7% |
| Nov 20 to Nov 23, 1981 | 2 days |
-0.1% |
+10.4% |
| Sep 30 to Oct 2, 1982 | 1 day |
— |
+36.2% |
| Dec 17 to Dec 21, 1982 | 3 days |
+0.8% |
+16.9% |
| Nov 10 to Nov 14, 1983 | 3 days |
+1.3% |
-0.4% |
| Sep 30 to Oct 3, 1984 | 2 days |
-2.2% |
+13.3% |
| Oct 3 to Oct 5, 1984 | 1 day |
— |
+12.6% |
| Oct 16 to Oct 18, 1986 | 1 day |
— |
+18.4%* |
| Dec 18 to Dec 20, 1987 | 1 day |
— |
+16.9% |
| Oct 5 to Oct 9, 1990 | 3 days |
-2.1% |
+24.8% |
| Nov 13 to Nov 19, 1995 | 5 days |
+1.3% |
+22.9% |
| Dec 5, 1995 to Jan 6, 1996 | 21 days |
-0.2% / 4.1%** |
+21.3% |
Data Source: NBC, St. Louis Federal Reserve
*The market declined 4.7% year-over-year if the next days’ data points are used; the stock market crash of 1987 occurred on Oct, 19, 1987, eliminating the year-over-year advance
**Nov 13, 1995 – Jan 6, 1996 performance, as the last govt closure is generally viewed as one event
Note: The chart above is for informational purposes only. It is not a solicitation to buy, sell, or hold stocks. Each event occurred amid its own unique set of circumstances. Past performance is no guarantee of future results.
This time around, the possibility of breaching the debt ceiling adds an unwanted wrinkle.
Before discussing the possible impact of a failure to raise the debt ceiling, a quick explanation of the two separate events is in order.
The partial government shutdown occurred amid the failure to authorize funding for non-essential services in the new fiscal year that began Oct. 1.
The debt ceiling prevents the government from adding to the federal debt outstanding, which currently cannot exceed $16.74 trillion. Periodically, the limit must be raised to accommodate deficit spending. Total federal debt has been stuck at $16.74 trillion since May, so the U.S. Treasury has been borrowing from federal worker retirement systems and issuing IOUs, which don’t count toward the official debt (First Trust Economics).
The Treasury Departments estimates it will run out of room to maneuver around Oct. 17. Even if non-essential services come back on line, i.e., the government shutdown ends, Congress must still raise the debt ceiling or the government will technically default on its debt.
Keep in mind that not all debt will immediately default. It is short-term T-bills that come due this month, interest owed on Treasuries at the end of the month, and any Treasury bonds that mature at month’s end. Such a default has never happened before; it would be unprecedented; there are no historical markers that might be used as a guide.
If it were to occur, a technical default would likely generate an enormous amount uncertainty in the global financial system. As the calendar marches towards the limit, we may see some additional volatility. But given possible consequences over a failure to raise the debt limit, odds still favor action before the clock strikes midnight. We continue to be underweighted in stocks/equities for all risk levels at this time, as we have been expecting some type of stock market decline to occur. Today, stock indices are down in general, while interest rates are lower (bond prices higher), and gold/silver prices rising as well. We will keep you posted.
We hope you all are enjoying the start to fall as we move towards the upcoming Holiday season. We appreciate the privilege to be of service, and as always, don’t hesitate to call if you have any questions or if we can be of further service in any way. Have a great week!
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.