government shutdown

Short Term Political Events Have Little Impact on the Stock Market

The market is off to a great start in 2018. Almost every day has brought a new high and each sector is up which signals a broad based market move.

What could get in the way?

Well, Washington has begun to intrude. Once again, the spectre of a government shutdown is looming, and the bipartisanship which would be necessary to compromise is completely absent. The Continuing Resolution if it is passed, only kicks the can down the road for three weeks. So It is well worth looking at the market’s track record during previous shutdowns.

In an article on CNBC, Fred Imbert looks at prior shutdowns, and what has happened to various asset classes.  The results are encouraging.

The upshot is that there is a small correction in the short term (average drop of .3%) within one week, but in the long term, the market shrugs off the hiccup, and continues to move upwards. In fact, the S&P rises over 2% on average over the following month.

This phenomenon is similar to stock market impacts from other catastrophic events. Initially the market panics, but then reason sets in, and the market bounce back. This is true of extreme political events like the Kennedy assassination, the shooting of Reagan, or even the vote for Clinton’s impeachment in the House. All of these events created a short term loss followed by the market regaining steam shortly afterwards.

Given this track record, are there opportunities? In the short term, volatility will increase. We are already seeing this now two days before the shutdown. So it may be a good time to buy into a small pullback, and wait for the market to start ignoring our politicians again.