How the S&P 500 performed after 10 previous government shutdowns

The S&P 500 has demonstrated resilience during the ongoing government shutdown, returning 0.80% between Oct. 1-6 and reaching new highs, aligning with historical trends where such stalemates rarely derail equities. This market stability is attributed to investors pricing in future conditions like softer inflation and potential Fed rate cuts, rather than short-term political "noise." For institutional investors, the implication is that a patient, diversified approach typically outperforms reactive trading during periods of political gridlock.

Analysis

With the government shutdown nearing its one-week mark, investors may be monitoring how the stalemate in Washington is affecting their portfolios. So far, stocks have been doing just fine. Although the S&P 500 was down slightly on Tuesday, the index returned 0.80% between Oct. 1 and Oct. 6 — and even notched several new highs. It turns out that market gains during and following a government shutdown are not unusual. "Historically, shutdowns themselves have rarely derailed equities," said Cathy Curtis, a certified financial planner and the founder and CEO of Curtis Financial Planning in Oakland, California. Curtis is also a member of CNBC's Financial Advisor Council. Markets don't price in 'current noise' The S&P 500 spiked 36% during the year after the last government shutdown, which ended in early 2019, Morningstar Direct found. One hundred days following the 1982 shutdown, the index was up 19.7%. "Markets are forward-looking and tend to price in future conditions, not current noise," said Andrew Hiesinger, founder and CEO of Quant Data, a market information platform. Post-shutdown gains aren't universal. For example, 100 days after the January 2018 shutdown, the S&P had fallen 4.5%, and was still down 3.1% at the one-year mark. The stock market isn't performing too poorly during the current shutdown because investors are betting on softer inflation and eventual rate cuts from the Federal Reserve, Hiesinger said. "The market has learned to discount recurring political drama that rarely changes long-term fundamentals," he added. That means investors can temper their reactions to the headlines, too, Curtis said. "The best response to a shutdown is usually no reaction at all," she said. "Staying invested through uncertainty has historically rewarded those who remain patient." The S&P 500 shutdown performance data also shows the benefits of investing in a diverse basket of stocks, such as through exchange-traded funds or mutual funds, rather than in any one individual company. "In times of political gridlock, broad exposure often outperforms reactive trading," Hiesinger said. The S&P 500 has demonstrated notable resilience during the ongoing government shutdown, returning 0.80% between October 1 and October 6 and reaching several new highs. This aligns with historical patterns, where shutdowns have rarely derailed equities, with the S&P 500 spiking 36% in the year following the 2019 shutdown and 19.7% 100 days after the 1982 event. However, not all post-shutdown periods were positive, as seen with a 4.5% decline 100 days after the January 2018 shutdown. This resilience is attributed to markets being forward-looking, pricing in future economic conditions rather than immediate political "noise." Investors are currently betting on softer inflation and eventual rate cuts from the Federal Reserve, which are seen as more significant drivers than short-term political gridlock. The market appears to have learned to discount recurring political drama that rarely impacts long-term fundamentals. Professional investors are advised to temper reactions to headlines, with experts suggesting "no reaction at all" is often the best response. Sustained market participation through uncertainty has historically rewarded patient investors. Furthermore, the data underscores the advantages of investing in a diversified basket of stocks, such as through ETFs or mutual funds, as broad exposure often outperforms reactive trading during periods of political uncertainty.

Key Decisions for Investors

• Maintain existing long-term allocations and resist impulsive trading decisions driven by short-term political headlines, as historical data suggests shutdowns rarely derail long-term equity performance.
• Prioritize diversified investment vehicles like ETFs or mutual funds to mitigate single-stock volatility during periods of political uncertainty, aligning with the observation that broad exposure often outperforms reactive trading.
• Monitor macroeconomic indicators such as inflation trends and Federal Reserve policy signals, as these fundamental drivers appear to be weighted more heavily by the market than immediate political events.