The history of stock recoveries after US Government Shutdowns

Commentators and investors have been anxious lately that the US economy is in trouble after the US Government’s recent 35-day shutdown, which ended on 25 January 2019. But things may not be as dire as some people fear.

This was the longest US government shutdown in history (and may resume in February if negotiations on border wall funding break down), but by no means the only one. In the 80s and 90s, and again in 2013 and 2018, impasses between the US House of Representatives, Senate and the President have in various ways resulted in failure to pass appropriation bills that fund government and its agencies for periods of time. This gives us around 10 shutdown precedents to examine for patterns.

Scott Garliss of Stansberry has done the looking, and notes that during three of the four previous shutdowns, stocks rose, and that after each shutdown ended, the market promptly showed strong returns. In fact, Garliss says, the average return a year after a shutdown was 19%.

During the recent shutdown, Garliss notes that US stocks rose 10% in a month. Perhaps another shutdown is coming if the Mexican Wall Standoff can’t be resolved, but given that stocks have survived the previous shutdowns, the future may be more resilient than people assume.

Some investors have certainly been spooked, pulling around US$28 billion out of global stocks, according to Brett Eversole, writing for Daily Wealth. The sudden rush of funds out of the market echoes a similar outflow in 2008 and 2011.

Eversole’s position is that this great outflow of cash from fearful investors is a contrarian indicator which occurs near the bottom of the downswing. In fact, in both October 2008 and August 2011, the rush away from global stocks was followed quickly by a rise in the S&P500 – the one-year return for 2008 was 25% and for 2011, 28%.

In short, Eversole recommends you sit tight and ride through the fear, as history suggests a rally is on its way, and has already begun following the December lows.

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Photo credit: Joshua Roberts, Reuters