The U.S. federal government officially entered a shutdown at 12:01 a.m. on Wednesday, Oct. 1, after Congress failed to reach an agreement on a spending plan.
While the headline news introduces a new layer of uncertainty for markets, historical data suggests that these events are often short-lived and have a limited long-term impact on equities.
For investors, looking past the political turbulence is often key. Here are the facts you need to know.
00:00Let's keep talking about the shutdown a little bit here.
00:02U.S. government shuts down as Trump's last-ditch effort fails.
00:05And from jobs to travel and more, here is the potential impact of the aptly named Schumer shutdown.
00:12The U.S. federal government officially entered a shutdown at 12.01 a.m. on Wednesday, October 1st,
00:17after Congress failed to reach an agreement on a spending plan.
00:20While the headline news introduces a new layer of uncertainty for markets,
00:24historical data suggests that these events are often short-lived and have a limited long-term impact on equities.
00:34For investors, looking past the political turbulence is often key.
00:38Here are some facts that you need to know.
00:41History shows that government shutdowns are generally not a reason to panic sell.
00:45I'm super thrilled that this is literally the first sentence of the first point,
00:50because this is something that I absolutely wanted to convey here today.
00:54Definitely something that I wanted to do.
00:56There's no reason to panic sell here today.
00:59If you're going to sell something, make sure that you have a really good reason and you feel good about it.
01:03Don't panic into anything here today.
01:06The U.S. government has shut down 20 times since 1976, with the average shutdown lasting only eight days.
01:12While some market volatility can occur, investors have generally looked past these budget-related disruptions.
01:18Market performance following a shutdown has been strong.
01:21The S&P 500 has historically posted average returns of 1.2% in one month and 2.9% three months after a budget has passed.
01:31One year after a shutdown ends, the S&P 500 posts an average gain of plus 13% and has ended higher in 86% of cases, according to the Cobisi letter.
01:42Now, I actually – I'll go ahead and give you this story.
01:46There's a couple of good tweets that you can pull from this story.
01:49I started with one here that I'm going to share with you folks now.
01:53This is, in fact, the Cobisi letter.
01:55And I think that this is really important.
01:56I've said for a long time that the media turns your brain to mush, and it is not something to be trusted.
02:04So we're going to go with this.
02:05Government shutdown facts that the media just simply won't cover.
02:08The average length of the shutdown is eight days.
02:10We just talked about that.
02:11The S&P 500 has ended higher one year after a shutdown in 86% of cases, which we just highlighted.
02:17The S&P 500 posts an average gain of 13% one year after the shutdown ends.
02:23During the 35-day shutdown in 2028 – or excuse me, 2028.
02:27Good Lord, Ryan.
02:28In 2018, the S&P 500 rallied 11%.
02:32That was the longest shutdown ever.
02:35S&P rallied 11% during that time.
02:37While the government is shut down, the U.S. defers about $400 million a day in costs.
02:44And the Fed generally turns more dovish if government data releases are paused.
02:49Historically, the market actually welcomes a shutdown.
02:53So, again, I suspect that we're going to see gloom and doom stuff.
02:58We always do.
02:59The stats don't necessarily paint that picture.
03:03They don't necessarily paint that picture.
03:05Now, there are some risks.
03:06It's not all going to be butterflies and roses, if that's the saying.
03:11The most significant immediate impact for financial markets is the suspension of vital economic data.
03:17The Bureau of Labor Statistics confirmed it will not collect or release any data during the shutdown, meaning that this Friday's highly anticipated jobs report will be delayed.
03:26This data blackout is the primary concern for investors and the Federal Reserve as it muddies the economic outlook.
03:34As Jim Bianco, president of Bianco Research LLC, noted, a prolonged delay in statistical reports can become a significant issue, making it difficult for policymakers and investors to make informed decisions.
03:45We covered this yesterday, but as the stats say, it's not likely what's going to happen.
03:52These shutdowns are often short-lived and probably won't produce any major market or economic negative impact.
04:04It goes on to say here that the duration is everything.
04:06While short-term shutdowns have a minimal economic impact, the longer the closure lasts, the greater the hit to growth.
04:13So this is definitely something that we should stay on top of here.
04:16A shutdown can reduce government spending.
04:18Thank God.
04:20Delay paychecks for hundreds of thousands of federal workers.
04:23Sad trombone.
04:24And disrupt private businesses that rely on government services.
04:28Shoulder shrug.
04:29The 16-day shutdown in 2013, for example, lowered annualized GDP growth by as much as six-tenths of a percent.
04:38That's according to the Office of Management and Budget.
04:41For now, LPL research notes that such events can create tactical opportunities to buy into a seasonally strong period for stocks.
04:50However, the key risk remains a prolonged political stalemate that could have a more tangible effect on the economy.
04:58So again, as the header here said, this seems to all be about duration, not the fact that the government actually shut down and the market is barely gapping down a half a percent.
05:11Here, we talked about this a little bit yesterday.
05:14Let's clarify this.
05:15Which other services and institutions are closed during a shutdown?
05:18Military employees would likely not be paid during a shutdown.
05:22National parks would be closed.
05:24The Labor Department and IRS would operate on a limited basis with no managed helplines for consumers.
05:31Regional Department of Veterans Affairs offices are expected to be closed.
05:35Social Security benefits would still go out.
05:38The FDA would not process any new drug applicants.
05:43Supplemental Nutrition Assistance Program or SNAP benefits would be covered for up to one month.
05:49Remember, the longest shutdown ever was 35 days, 34, 35 days, and SNAP benefits are going to be covered for a month.
05:56And the National Zoo in Smithsonian in Washington, D.C. would not be open.
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