The US government was more likely than not to shut down by the end of the month, which could have spelled trouble for the market if policymakers had not reached a consensus on the nation's budget for the next fiscal year.
The odds of a shutdown surpassed 50%, according to Goldman Sachs Research chief political economist Alec Phillips, with so far zero spending bills passed as policymakers spar over government budget constraints. And the last time Congress failed to strike a deal over the budget in time, the S&P 500 dropped 2.7% on the first day of the shutdown, according to Renaissance Macro data.
New research from RBC Capital Markets strategist Lori Calvasina on Monday found that before the last seven government shutdowns of 10 days or more spanning back to 1976, the S&P 500 median decline amounted to 10.2%.
The largest S&P decline of 19.8% came ahead of the government shutdown that lasted from Dec. 21, 2018, to Jan. 23, 2019. The smallest stock decline tallied 3.7% in the lead-up to the 21-day shutdown that ended on Jan. 6, 1996.
Nevertheless, there are at least two positive things that typically come with shutdowns. First, markets often bounce back after squabbling politicians reconcile their contentious issues and reopen government. According to RBC's research, in the 12 months following a government shutdown of 10 days or more, the S&P 500 has gained a median of 18.9%.
And two, data from Truist analyzing the last 20 shutdowns going back to 1976 shows that stocks have been up 50% of the time during the actual shutdown period.
The stock market's top strategists are not too troubled by the possibility of a shutdown.
“Shutdowns have not had profound effects on markets in the past, and we do not think it will be any different this time," Barclays municipal bond analysts wrote.
“Government shutdowns tend to be high profile though low-impact market events,” wrote Truist Advisory Services’ co-chief investment officer and chief market strategist Keith Lerner. “While uncertainty around these events tends to heighten investor angst and adds to short-term market volatility, the historical evidence suggests a minimal lasting market impact.”