Thursday, October 03, 2013

Government Shutdown: Time To Buy Or Sell Stocks?

With the government shutdown completing its third day, investors are certainly asking themselves whether they should reduce their equity exposure as this media fueled crisis drags on. We wrote a post several days ago, Prior Government Shutdowns And S&P 500 Performance, outlining the market's performance in the prior 17 government shutdowns. Several other firms have written commentary about the market's performance around prior shutdowns as well. The first is from the Chart of the Day charting service and they note the following along with a performance graph,
"Monday marked the beginning of the 18th government shutdown in US history. For some perspective, today's chart plots the average S&P 500 performance for the 20 trading days (approximately one calendar month) before and 60 trading days (approximately 3 calendar months) after a government shutdown began. As today's chart illustrates, the stock market has tended to struggle prior to and during the initial three days following a government shutdown. Following this, the stock market has (on average) trended higher over the ensuing three months. One explanation for this particular average pattern is that the market abhors uncertainty. So as the shutdown approaches, investors fear for the worst. However, after the shutdown begins and investors notice that the economy continues to function coupled with the fact that the shutdown may be short-lived ultimately encourages a stock market rally as investors worst fears are not realized. It should be noted that today's chart is an average performance chart and that following the last 17 shutdowns, the stock market traded up 60 trading days after a shutdown on 10 out of 17 occasions (i.e. 58.8%) with the average shutdown lasting 6.4 calendar days."
From The Blog of HORAN Capital Advisors

The other firm, Guggenheim Partners, prepared the below chart showing the performance of differing asset classes during the shutdown period and the 10-day period following the shutdown's end.

From The Blog of HORAN Capital Advisors

In large part the market's short term reaction to this event is more of an emotional one than fundamental one. However, if the crisis drags on for weeks, the government will bump up against the debt ceiling limit and further market disruption could be the fallout. From a positive standpoint though, the government is taking in sufficient tax revenue to continue paying the interest due on the outstanding debt. A debt default would only occur if a conscious decision is made by the executive branch to skip the interest payments due on the government's outstanding debt.

At the end of the day, the market does not like uncertainty and this shutdown is creating just that. However, not if, but when a resolution is finally agreed upon, the equity market will again trade on fundamentals. At the moment, company fundamentals and the economy have not been negatively impacted, but if the shutdown drags on into weeks like the shutdown in 1998, a differing story could unfold.

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