Government Shutdown Stock Market Analysis: What History Tells Investors 🤔

Historical data suggests that government shutdowns typically do not negatively impact long-term stock market performance and, surprisingly, often precede periods of S&P 500 outperformance compared to its average returns.

• Government shutdowns cause short-term market volatility but have little impact on long-term investments.

• The S&P 500 often outperforms its average returns in the months following a shutdown.

• October is the most volatile month for the stock market, though volatility does not equate to negative returns.

An analysis of past government shutdowns reveals that while they may cause short-term volatility in the stock market, their long-term impact on retirement and other investments is negligible. Historically, the S&P 500 has demonstrated an ability to outperform its average returns in the three, six, and twelve months following a shutdown, especially when the market is at or near all-time highs entering the shutdown period. October is also highlighted as the most volatile month for the stock market, regardless of government shutdowns, though volatility does not inherently imply negative performance.

Historical Shutdown Impact

• 00:00:46 Reviewing six past government shutdowns that lasted more than one day, including the longest 34-day shutdown in 2019, shows that immediate volatility is common in the one-week and one-month periods following a shutdown's start. Despite this initial turbulence, which causes minor fluctuations, the market's behavior over longer periods—three, six, and twelve months—remains largely unaffected. The market often maintains its trajectory, suggesting that shutdowns have minimal lasting impact on long-term investment performance.

S&P 500 Outperformance

• 00:03:52 Analysis of S&P 500 performance after government shutdowns reveals an interesting trend: on average, the S&P 500 outpaces its typical performance over three, six, and twelve-month windows. For example, the average three-month performance after a shutdown is 6.4%, significantly higher than the average 3% for any three-month period. This suggests that instead of being chaotic for the stock market, government shutdowns paradoxically tend to precede periods of stronger market growth.

October Market Trends

• 00:05:56 October typically shows positive average intra-month performance over both the last 10 years and looking back to 1983, despite some choppiness at the start of the month. If the year is down going into October, the month tends to sell off initially before rallying to a positive performance. However, if the market is up 10% or more, momentum tends to continue, although an outlier event like 1987 can skew averages, showing a potential sell-off towards the end of the month without it necessarily being negative.

October Volatility Explained

• 00:08:44 October is historically the most volatile month for the stock market, characterized by wider average daily price ranges for the S&P 500 compared to other months. For example, October's average range can be nearly 8% (almost 4% up and almost 4% down), while January's is around 6.5%. It is crucial to understand that volatility signifies significant price movement or 'whipsaw' effect, but it does not inherently imply negative performance; it can be positive or negative, reflecting an increased discomfort in market movements rather than guaranteed losses.