Don't Panic Over the Government Shutdown

This has been the big topic in the media recently...

I'm talking about the government shutdown. It started earlier this week.

Unfortunately, political games surrounding government shutdowns are nothing new. Politicians are arguing over who is to blame. Government employees are on furlough. We are seeing cuts in government services. Parks and museums are closing.

Most shutdowns have been relatively short. But the longest lasted 35 days. It began in late December 2018 and lasted through most of January 2019.

Of course, the media sounds the alarm when a shutdown happens — or when one is looming. We saw that recently.

And for many people, this can be a big problem. As I said, government employees are on furlough. And government services are interrupted.

But historically, markets don't react the way you might expect...

History shows that markets "ignore" government shutdowns
We measure the broad market with the SPDR S&P 500 Fund (SPY). Let's look at SPY's performance during three of the longer government shutdowns...

The first one we'll look at happened at the end of 1995. The shutdown began on December 16 of that year and ended on January 6, 1996. It lasted 21 days.

During this time, while the markets were open, SPY remained virtually unchanged. In fact, it lost less than half a percentage point during those three weeks...
This is by no means an unusual chart. SPY did not move more than 2% on any single day during this hiatus.

Moving on, another shutdown, lasting several weeks, occurred in early October 2013. It lasted 16 days. During this period, SPY rose by about 2%...

And again, this shutdown lasted just over two weeks. But the markets remained unaffected.

Finally, let's look at the longest shutdown in US history...

It began on December 22, 2018. And as I mentioned earlier, it lasted more than a month.

Of course, when it started, no one knew how long it would last. Considering how long it dragged on, one might have expected the market to crash.

But that didn't happen...

During the shutdown, the SPY rose by more than 10%. Check out the jump...

Simply put, that's an incredible gain for about a month. The average return on the S&P 500 is just over 10% per year.

In April, Vic Lederman noted another point following this record closing...

2019 turned out to be an extremely successful year for the markets. The S&P 500 rose by almost 29%.

So the next time you see a scary headline about the government shutdown, pause for a moment. As Vic said in April...

History shows us that these "market-ending" events don't always play out the way investors expect.

Of course, the government shutdown hasn't started yet. And we'll probably see some volatility.

But regardless of your political beliefs, don't let your personal political views — or your emotions — influence your investments. A government shutdown isn't an automatic reason to panic.