Nearly all the world's major stock indexes are down today -- the Dow is off by 126 points as I write this -- and the cause seems pretty obvious: The U.S. government is on the verge of shutting down for the first time since Bill Clinton made Newt Gingrich sit in the back of a plane 17 years ago. Indeed, investors have been skittish for a while: U.S. equity values are down about 2.6 percent since Sept. 19, while 5-year inflation expectations have dropped by more than 0.1 percentage points.
Yet if it is the shutdown that has everyone spooked -- and not the far larger threat posed by a failure to lift the debt ceiling -- then things should calm down in a hurry. A quick check of the performance of the S&P 500 stock index during previous shutdowns suggests that equity prices might actually benefit from a brief suspension of federal government activities.
Using a set of dates compiled by Dylan Matthews at the Washington Post, I looked at price changes in the S&P during each previous government shutdown, as well as the 2-month change in stock prices from the day before each shutdown began. The average price change in the S&P 500 over the course of all 17 previous shutdowns is about -0.7 percent. By contrast, the stock market gains about 1.3 percent on average over the two months following each day that precedes a shutdown. This compares with an average two-month price gain of about 1.9 percent since the beginning of 1976.
This methodology has some limitations. Not all shutdowns are created equal. Some lasted only a day, while the most recent one lasted for about a full month. More significant is that the shutdowns that occurred before 1980 didn’t actually lead to work stoppages by federal employees. Finally, the economy’s resilience to changes in government policy is not constant over time.
Stock traders seem to like the shutdowns that occurred since 1980. The average price change in the S&P 500 over the course of each shutdown was a gain of about 0.2 percent. In the two months since the day before each shutdown began, the S&P 500 gained about 3.7 percent. That performance is significantly better than the index’s average two-month gain of just 2 percent since November, 1981. One could naively look at these data and conclude that a shutdown might even be beneficial, although I would be skeptical of anyone making that claim without additional evidence.
Bottom line: Don't put too much hope into the theory that markets will force politicians to see the folly of a government shutdown.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)