Can We Live With A Government Shut Down? We Have Before...

The latest headline roiling markets this week is the impasse in Washington regarding passage of a funding bill to keep the Federal Government up and running. If an agreement isn’t reached today, the Federal Government will shut down. Based on the sell-off in global stocks on Thursday, the markets are telling us that a potential government shutdown must be a big deal. While it certainly could be for those government workers that wouldn’t have a job to report to during a shutdown, most people will have a hard time noticing a change. Essential services like the military, post office and TSA will continue to operate - social security checks will still go out. Generally, government workers will also get back pay for the lost time once the government reopens, kind of like a paid holiday they weren’t expecting. While a shut down certainly doesn’t help the economy, is it really as big a deal as the market is making it seem? Let’s look at history for some perspective.

Since 1976, there have been 20 government shut downs. This year alone we’ve already seen 2 of them, both less than a week long. We also had one during the Obama administration that lasted 17 days. Standard & Poor’s estimates that the Obama era shut down cost the US economy about $24 Billion of lost economic activity. Yet, the S&P 500 actually went up by 3.1% during that time. Take a look at this table:

We’ve had shut downs under Democrats, and we’ve had shut downs under Republicans. We’ve had shut downs during good times. We’ve had shut downs during bad times. The one common factor is that they’ve all ended…eventually. The average shut down over this period was 8 days.

Yet, the median return during those 20 shut downs is exactly 0% (mean average is -0.4%). 50% of the time the market goes up, 50% of the time the market goes down during a shut down. At the end of the day, a government shut down may make for great ratings for the media but the reality is that they’re generally a non-event for the stock market. This is yet another example of noise that is driving fear, since we may not even get a shut down in the first place. Fear is what’s been moving markets over the past 3 months, and it’s been in no short supply.

So what’s an investor to do? Keep your eyes down the road on where you want to go, and don’t let the bumps in the road distract you. Remember that properly constructed portfolios are designed to work over time, but there will occasionally be times when it doesn’t feel like it. These strategies need time to work, so the best thing for long term investors to do is avoid mistakes. Not sure what that means? Take a look at this post from a few weeks ago: Driving on Ice.