October has started with a significant event as the government has entered a shutdown, stirring discussions among economists and market analysts regarding its potential impact. While government shutdowns are not new—having occurred 20 times since 1976, typically for brief periods averaging around eight days—experts believe this particular shutdown could carry unique implications.
Historical data suggests that the effect of shutdowns on the markets has often been minimal, with past trends showing a slight upward skew in S&P 500 returns during these periods. Jeff Buchbinder, chief equity strategist at LPL Financial, noted that most past losses during shutdowns occurred in the late 1970s, and since then the largest decline has been just 2.2%. This leads to the possibility that stocks may perform well during this current shutdown, although he cautioned that past performance does not guarantee future results.
The S&P 500 has historically remained nearly unchanged during such shutdowns, with only a few notable exceptions. For instance, the 2013 shutdown, which lasted from October 1 to 17 due to disputes over the Affordable Care Act funding, resulted in a 3.1% gain for the equity market over the duration. Similarly, during the more prolonged shutdown in December 2018 that stretched into early 2019, the S&P 500 saw a remarkable increase of 10% over 35 days.
In the bond market, reactions to government shutdowns have been equally subdued. Historically, Treasuries have shown resilience, often rallying amidst uncertainty. Buchbinder highlighted that the last three government shutdowns resulted in an average decrease of about five basis points in the 10-year Treasury yield.
However, this particular shutdown comes with heightened uncertainty, particularly due to the potential delays in critical economic data—the jobs report and consumer inflation—which could cloud the outlook for future interest rate cuts. This situation is notably different from past scenarios, as it arrives during a period when investors have been anticipating rate cuts throughout the year. Disruptions in projections related to these cuts could have negative consequences for the markets.
Economist Mark Zandi expressed concern that if the shutdown continues for an extended period, it could impede the Federal Reserve’s decision-making capabilities, thereby amplifying its potential negative impact on the economy.
As lawmakers grapple over funding issues, the financial world watches closely, anticipating how this shutdown might influence market behaviors and economic policies moving forward.
