A Government Shutdown Will Not Crash the Stock Market

AP Photo
The Associated Press

The nation’s capital is consumed with the question of whether or not the government will shut down over the weekend.

The stock market? Not so much.

Stocks were up Thursday morning even as a shutdown looked more and more likely because Democratic lawmakers vowed not to vote to fund the government unless Republicans grant permanent amnesty to illegal aliens now permitted to work under the temporary relief program known as Deferred Action for Childhood Arrivals, or DACA.

Republicans say they will not do that unless Democrats agree to other immigration reforms–such as funding border security and ending chain migration–which the Democrats so far refuse to do.

The disconnect between Washington and Wall Street this week is very much a microcosm of what has happened the past year. From the Beltway perspective, it’s been a year consumed by hatred, chaos, protests, and violent tweeting. For investors, however, markets have been remarkably calm and benevolent, setting new record highs every few days. Volatility is way down, prices are way, way up.

Government shutdowns do not usually result in much market disruption–and have never produced anything like a market crash. According to a MarketWatch analysis based on data from LPL Financial, the performance of the S&P 500 was positive during 44.4 percent of the 18 government shutdowns since 1976. It declined in just 50 percent of those shutdowns. In one shutdown, it was unchanged.

On average, the market falls by just 0.6 percent while the government is shut down. The worst performance during a shutdown was the 4.4 percent drop over the 11-day shutdown in 1979. The median performance during shutdowns is actually just neutral. The dips are fully offset by the gains.

Recent shutdowns have all been positive for markets. The first 1995 shutdown saw a market rise of 1.3 percent. The second 1995 shutdown: a rise of 0.1 percent. That famous debt-ceiling shutdown face-off in 2013? The market rose 3.1 percent.

A recent CNBC analysis looked at the performance of the S&P 500 one week after a shutdown begins. It found that the average performance was a decline of just 0.3 percent and that markets rose around 40 percent of the time. Even more reassuring, one month after a shutdown, stocks are up 2.1 percent on average and positive 80 percent of the time.

This may make a shutdown more likely. President Donald Trump likes to tout the performance of the stock market when enumerating his administration’s accomplishments. History suggests that a shutdown will not hurt markets much, if at all. That may take away one incentive for lawmakers and the White House to reach a deal.