Market Health

Will the Rumored Government Shutdown Sink Your Retirement?

It’s baaackkkk!

Like a creature emerging from a fetid swamp…

Just when investors thought they had to worry only about pork belly politics, the bitter partisanship in Washington, D.C., has the threat of a government shutdown back on the table.

With Halloween around the corner, it seems apropos that these specters are once again haunting investors…

A government shutdown sounds horrible and frightening.

But what would that really mean for the markets?

It’s Not Just Mom Jeans and Clogs

Last week, the White House told government agencies to prepare for a government shutdown.

The House of Representatives passed a measure that would temporarily fund the government through this December and suspend the $28.4 trillion debt ceiling until December 2022.

But yesterday, the Senate blocked the bill in its entirety.

Now Congress needs to approve government funding before midnight on Thursday to avoid a shutdown – a daunting task for the next 48 hours.

Sadly, government shutdowns are nothing new.

In fact, the last one wasn’t even that long ago.

From December 22, 2018, to January 25, 2019, the U.S. government was closed for business. And that 35-day stretch was the longest and most expensive government shutdown in history.

On top of that, it wasn’t the only shutdown of 2018. From January 20 to January 22, disputes over the Deferred Action for Childhood Arrivals policy triggered a shutdown.

And over the last four decades, we’ve also had shutdowns in 1980, 1981, 1984, 1986, 1990, 1995, 1996 and 2013.

The budget deadlocks went out of vogue for a brief spell in the early 2000s. But like “mom jeans” and clogs, they’re back in style.

But what happens to your portfolio if Washington’s gridlock moves from the Beltway to the vacant halls of the Capitol?

Green Days on Unofficial “Holidays”

First, as a longtime Washington, D.C., area resident, I can tell you that government employees view shutdowns as holidays.

But for people in need of government services, shutdowns can be tragic. This one could be even more difficult, as we’re still in the midst of a pandemic (which is one of the reasons short-term funding is likely to be passed).

Investors often fret over shutdowns, but these periods ultimately prove to be inconsequential for the markets. The markets historically have shrugged them off once they’ve begun.

And that’s due to the fact that most shutdowns are relatively short or impact only a portion of the government. For example, the four shutdowns of the 1980s lasted a day or less.

In fact, through the increasingly historic shutdowns of the 1990s to today, the S&P 500 Index has performed quite well during the federal closures.

Even during the longest U.S. shutdown ever, the S&P 500 rallied a hair more than 11% from the morning of December 24, 2018, to the market’s close on January 25, 2019.

Now, that doesn’t mean it’s all sunshine and puppy kisses.

There are moments of panic when closures are first announced. (Use these to your advantage!)

The S&P 500 has tumbled an average of 0.87% on the first day of trading during shutdowns. The biggest declines of more than 1.5% were in 1996 and December 2018. And most of us remember that last one quite vividly because it was the worst Christmas Eve session in market history.

It was a perfect storm of events. The government shutdown was announced over the weekend as tensions escalated between the U.S. and China. So the first day of trading after the shutdown had started was chaotic. The S&P 500 tumbled 2.71%.

But on December 26, 2018, the index notched its largest single-day point gain ever (until eight wild days in March 2020 topped it).

So the takeaway here is this…

If the government shuts down – today, tomorrow, three months from now, etc. – your gut reaction as an investor will likely be to panic.

But in the end, these are practically nonevents for the markets. The S&P 500 continues to charge higher during federal closures, no matter how long they may last.

So don’t fear that a government shutdown might sink your portfolio. Historically, the opposite is true. And that’s the one silver lining in this entire swampy mess.

Here’s to high returns,

Matthew

P.S. Click here to read my other articles about market health.

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