Don’t Sweat a Government Shutdown. Stocks May Go UP.


Government shutdown - Don’t Sweat a Government Shutdown. Stocks May Go UP.

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Apologies to Ben Franklin, but it seems that there is a third certainty in life besides death and taxes: Republicans and Democrats in Washington not getting along.

And while you’d think that the looming government shutdown would be a bad thing for stocks, you’d probably be wrong.

Investors have seen this particular movie before. Numerous times in fact. Shutdowns are now a somewhat regular occurrence in this increasingly rancorous political environment.

The last time Congress took its toys and went home was a 35-day stretch that lasted from the end of December 2018 through late January 2019. But according to research from Ryan Detrick, chief market strategist at The Carson Group, the S&P 500 rose more than 10% during that period.

Why Stocks Could Go Up in a Government Shutdown

Now before you write that off as just a combination of the typical end-of-year Santa Claus rally and the January effect in the beginning of a new calendar year, consider this. Stocks have actually gone up during five of the past shutdowns…dating back to 1995. And the S&P 500 is up slightly, on average, during all 22 shutdowns and funding gaps that have taken place since 1976.

“The market knows this will be resolved and tends to look forward, past the scary headlines,” Detrick wrote in a blog post, adding that “shutdowns don’t have to be bearish.”

Even defense stocks, which are highly dependent on military spending from the Pentagon, didn’t suffer during the 2018-19 shutdown. The iShares US Aerospace & Defense ETF (BATS:ITA), which owns Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC) and other top contractors, rose nearly 13% during the last shutdown.

It’s also important to note that a government “shutdown” is a bit of a misnomer. Yes, many offices in DC will close and a large chunk of federal workers won’t get paid.

But it’s not as if Washington completely grinds to a halt. As Detrick points out, so-called essential services will not be affected. Washington will continue to send out Social Security and Medicare payments, for example. Post offices will remain open too.

So, a shutdown likely won’t hamper the economy enough to make a significant dent.

In fact, Libby Cantrill, head of U.S. public policy at bond investing giant PIMCO, thinks that any contraction to GDP during a shutdown will quickly reverse itself once the government is back up and running and federal workers start getting paid again.

Buy the Shutdown Dip in High-Quality Stocks

That’s why a shutdown may be just another example of political theatrics, and not an event for long-term investors to worry about. Traders might be better off buying stocks and ETFs if there is any brief market blip.

“Despite the likelihood of a government shutdown, Wall Street has so far just yawned and said, ‘Here’s another example of how Congress can teach Hollywood a thing or two about drama,’” said Sam Stovall, chief investment strategist at CFRA Research, in a report.

In other words, don’t sweat the tough talk from political leaders on both sides of the aisle. Seize the opportunity to buy more quality stocks trading at reasonable valuations.

As of this writing, Paul R. La Monica did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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