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Will a government shutdown cause a market meltdown?

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There has been a lot of talk about the impasse in the House and Senate over passing a continuing resolution before October, 1 and a possible government shutdown. Its business as usual if you’re considered an essential employee that has responsibilities for national security, air traffic control, information technology and the like; and if not –well may be time for a furlough type vacation. There have been 17 government shutdowns in U.S. history, spanning 1976 to 1995, lasting 1 to 21 days. The last three shutdowns include one in 1990, under President George Bush, and the most recent two in 1995 under President Bill Clinton. The last shutdown was the longest of 21 days; starting Friday December 15, 1995 and ending Saturday January 6, 1996. Based on return period alone, one could argue that we may be about due. It is also interesting to note that no shutdowns occurred before 1976. What has changed? I don’t know, but expanding national debt and give me a bigger hammer political posturing come to mind as possibilities.
To find out if market behavior is affected, prior, during and after these shutdowns, I turn to the charts and use SP 5oo as a guide. The data I available only goes back to 1990, so I show the last three government shutdowns; under President George Bush in 1990, and again two in 1995 under President Bill Clinton.
The first shutdown, under President George Bush, was from Friday October 5, 1990 to Tuesday October 9, 1990. Vertical blue lines on the first SP 500 chart show this three day period. The market was already in a downtrend in a slight countertrend rally, but continued to sell-off after the debt issue was resolved. The low came two days after the resolution and the downtrend reversed. The second shutdown shown was under President Bill Clinton, from Monday November, 13 1995 to Sunday November 19, 1995. The SP 500 was already in an uptrend and the only thing notable was perhaps a slight acceleration. The most recent shutdown shown on the same chart was from Friday December, 15 1995 to Saturday January 6, 1996. Again we see the same uptrend and even acceleration after a two day drop from resolution.
From this limited sample, it appears that wrangling in Washington has little to do with the market trend when the government shuts down, despite what the talking heads on the news syndicates may suggest. Of course it is curious that the mean trend reversed several days after the government was funded in 1990, and the trend accelerated after resolution in 1995. So if anything, it may appear that a shutdown is a set-up for a market climb. Semiconductors lead the way!!!-bush-jpg Semiconductors lead the way!!!-clinton-jpg

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  1. FireWeatherMet's Avatar
    Nice analysis..think it proves that market cycles continue to dominate...that the shutdowns act mainly to accelerate or decelerate that trend.

    The Debt Ceiling fight has been, and will be something bigger that could disrupt any short term market cycle sharply t the downside, since US securities are held all around the world as a "safest of all investments". Taking thata safety factor away and defaulting can easily do in early-mid Oct what it did 2 summers ago...10-20% drop.

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