The government shutdown is the all-consuming, oxygen depriving, news headline of the moment. On one hand, it could easily be a negative influence on our stock market. On the other hand, political tribalism has made a government shutdown an all too common occurrence – a mere inconvenience? Global equity markets experienced a dramatic correction this past December, driven by a variety fears that have little fundamental justification. The early 2019 rebound is reminding investors to react to the data (such as reasonable valuations, or low interest rates, or positive employment reports), not the hype. Will a prolonged government shutdown become a market-moving data point, or simply more negative hype?
The chart below, compiled by The Vanguard Group based on data from the Congressional Research Service, looks at the market’s reaction to each of the last 20 shutdowns dating back to the fall of 1976. The main takeaway is that while government shutdowns do infuse a level of short-term volatility into the stock market, the lasting effects are minimal. The bigger issue is the threat that it causes to the financial security of the impacted government employees.
*The government shut down overnight. An agreement was reached before the markets opened.
Rarely have we experienced a market so influenced by negative sentiment, attributed to political dysfunction and investment media noise. It is very difficult to set aside overwhelming pessimism, to focus on and trust the fundamentals that determine long-term investment returns – but successful investors do. The government shutdown, monetary and fiscal policy, and trade tariffs are all valid concerns – but not to the degree that will ultimately justify the downside volatility of late 2018, or that will prevent a well-balanced portfolio from generating a reasonable rate of return.