As a professional copywriter, I have analyzed the impact of past government shutdowns on the stock market to provide valuable insights for investors. Despite the potential mid-November U.S. government shutdown, there is no need for stock market investors to panic.
Since 1981, there have been a total of 10 government shutdowns, highlighting the unfortunate reality of our political system. However, this sample size is large enough to draw some tentative statistical conclusions. It is worth noting that government shutdowns became a regular occurrence only after a 1981 ruling by the then U.S. Attorney General.
Interestingly, in the month leading up to those 10 shutdowns, the stock market performed similarly to when the government was operating normally. In fact, during the shutdowns themselves, the stock market performed slightly better than average. However, it is important to emphasize that this outperformance does not meet the traditional standards of statistical significance.
In the event of a government shutdown, it is projected to happen on November 17, when the temporary spending measure passed by Congress on October 1 expires. According to betting markets, there is currently a one-in-three chance of a shutdown occurring.
To assess the impact of past shutdowns on the stock market, I referred to a compiled list by the History channel. This allowed me to measure the total return of the stock market during each shutdown and in the month leading up to it. The summarized averages can be seen in the chart below:
By studying historical data and observing previous government shutdowns, it becomes clear that the stock market has not been significantly impacted. While caution is always prudent in times of uncertainty, investors can take solace in the fact that past shutdowns have not diverted the stock market from its normal trajectory.
The Impact of Government Shutdowns on the Stock Market
In late 2018 and early 2019, the United States experienced a government shutdown. While some might assume that such an event would have a significant impact on the stock market, historical data suggests that other factors play a much larger role in influencing stock prices.
During the previous shutdown, which lasted from December 21 to January 25, the Wilshire 5000 total return index actually gained an impressive 11.2%. This contradicted the common belief that the market reacts negatively leading up to a shutdown. It appeared to be a case of "sell the rumor, buy the news."
However, it is essential to understand that the true cause of the market's volatility during that period was not the government shutdown itself. Instead, it was the actions of the Federal Reserve. In 2018, the central bank had repeatedly raised interest rates, leading to a significant decline in the stock market starting in September of that year. The market even briefly entered official bear market territory after the last rate hike on December 19, 2018. Fortunately, members of the Fed's interest-rate-setting committee signaled a change in course by announcing a "pause" in rate hikes, which resulted in a swift recovery for the market.
While government shutdowns may have some impact on the stock market, it is clear that other events, such as monetary policy decisions by the Federal Reserve, have a far more substantial effect. It is crucial for investors to consider these larger factors when making decisions about their portfolios.
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