Why investors don't need to play defense during the government shutdown — even if it lasts

Historical analysis of government shutdowns suggests investors should avoid a defensive posture, as the S&P 500 has generally remained flat or gained, even during the longest instances. During the December 2018-January 2019 shutdown, cyclical sectors like Financials and Consumer Discretionary significantly outperformed, while defensive sectors such as Utilities declined, indicating markets often absorb these events with a continued preference for growth-oriented exposures.

Analysis

Historical market performance suggests that U.S. government shutdowns are not a catalyst for defensive investor positioning. Analysis of 21 shutdowns over the past 50 years indicates the S&P 500 has, on average, remained flat with a slight bias towards gains. The most relevant precedent, the longest shutdown from December 2018 to January 2019, reinforces this view, as the market displayed a clear preference for risk-on assets. During that period, cyclical sectors led performance, with the Financial Select Sector SPDR ETF (XLF) and the Consumer Discretionary Select Sector SPDR ETF (XLY) emerging as the top performers. Conversely, defensive sectors lagged significantly; the Utilities Select Sector SPDR ETF (XLU) was the only sector ETF to post a decline, and the Consumer Staples Select Sector SPDR ETF (XLP) was the next-worst performer. This historical pattern, where investors have handled shutdowns "in stride," is further supported by current intraday market action, which saw the S&P 500 reverse an initial 0.4% loss to a 0.4% gain. While the limited sample size of prolonged shutdowns warrants caution against making absolute conclusions, the data points to market resilience and a tendency to look through the political disruption.

Key Decisions for Investors

• Investors should consider that a significant rotation into defensive assets may be counter-intuitive, as historical data shows markets tend to absorb government shutdowns with minimal negative impact.
• Maintaining or increasing exposure to cyclical sectors, particularly financials (XLF) and consumer discretionary (XLY), could prove advantageous given their documented outperformance during the longest shutdown on record.
• It may be prudent to review and potentially underweight defensive holdings, such as utilities (XLU), which have historically underperformed and even declined during extended shutdown periods.
• While the precedent is for markets to remain resilient, monitor for any signs that the current shutdown is having a more pronounced economic impact than past events before making significant portfolio adjustments.