33 Hours ‘Til Closure

Will they or won’t they? As we write, the House of Representatives has just shot down a stopgap funding bill that probably would have died in the Senate regardless. If there is no deal funding government operations by midnight Saturday, a partial government shutdown will begin Sunday. There is a lot of handwringing about this—some political, which as always we have no opinion on, and some economic. The consensus view seems to be that a short shutdown may not much impact GDP, but a longer one would be quite deleterious, hitting stocks. We doubt it, and market history seems to side with us.

Pretty much every American publication big and small has a piece out describing what does and doesn’t stay open during a shutdown, along with who gets furloughed and who works without pay temporarily. Most of it correctly notes all these folks eventually receive full back pay. Some of it laments the lost business for Washington, DC cafes and bodegas, while other coverage points out that a large segment of civil servants are still working remotely, rendering that effect smaller than it might have been in the past. And there seems to be no small amount of debate over whether National Parks would close fully—or just their toilets. Hey, first-world problems are still problems. At any rate, we won’t rehash all the shutdown ins-and-outs here. (Also, we covered them a month ago.)

Instead, we will resurrect a table we have shown before. Exhibit 1 lists every government shutdown and market returns before, during and after it. As you will see, it is very common for returns to wobble in the run-up, which we have seen this time around. There is also some variance during shutdowns, with the ups and downs averaging out to 0.1%. But after the shutdowns, returns are overwhelmingly positive, with just one instance of negative returns over the next year. That occurred in 2018, with the negativity coming primarily from a slew of hedge fund closures moving the market at yearend. And even with this negative outlier, S&P 500 price returns averaged 12.1%. Economically, only three of these shutdowns coincide with recessions (November 1981’s, September – October 1982’s and October 1990’s), and the recession predated shutdown in each case.^[i]

Exhibit 1: Government Shutdowns Don’t Derail Stocks

Source: FactSet, as of 9/23/2021. S&P 500 price returns, 9/30/1975 – 1/25/2020.

So no, we don’t know what will happen immediately from here. Congress could reach a deal, or not. Short-term volatility could linger even if there is a deal, as a shutdown isn’t the only fear weighing on stocks right now. But whatever happens to stocks over the foreseeable future, it won’t hinge on a shutdown. As always, stocks will weigh the likelihood that the economic and political backdrop drives stronger-than-expected corporate earnings growth over the next 3 – 30 months. Counterintuitively, the shutdown showdown is a positive sign on this front, as it is emblematic of the gridlock that keeps economic policy mostly status quo, reducing uncertainty. You may not like all the squabbling, but for stocks, the noise is static that hides bullish inactivity.

Have a nice weekend.