Welcome to the third government shutdown of 2018! Did you forget about the first two? In January, there was a three-day closure, and then in February, there was the one-day sequel. In both of those instances, investors shrugged off the news and stocks actually edged up during those days-long shutdowns. In the 20 previous shutdowns going back to 1976, stock prices have rarely moved significantly during the government closures, according to data from LPL Financial Research.
This time could be different, though. As a quarter of the U.S. Government, including 380,000 employees – and another 420,000 deemed too essential to be furloughed and will be reimbursed later – braced for the shutdown, stock markets were already rolling over. (NOTE: The shutdown will not affect the entitlement programs, including Social Security, Medicaid, Medicare, food stamps, the USPS, the military and the Department of Veterans Affairs.)
Investors have been gnashing their teeth over slowing global growth, the unresolved U.S.-China trade war, the ongoing drama around Brexit and risks in the corporate debt markets. Last week, the Fed added to the agita. While a quarter-point hike was widely expected, investors really, really wanted the central bankers to hit the pause button on further increases next year.
Instead, while Chairman Jerome Powell acknowledged “cross currents” in markets and noted that growth is softening, he and the other Fed officials still project that they will need to raise interest rates two more times in 2019, down from the previous estimate of three. Additionally, when asked about the current process to unwind the Fed’s multi-trillion-dollar portfolio of bonds (acquired during the financial crisis and its aftermath), Powell noted that it “has been smooth and has served its purpose and I don’t see us changing that” and that it is not “creating significant problems.” Investors heard this comment, worried that the Fed is on autopilot and quickly bailed out of stocks.
All of this has added to a dismal month, on track to be the worst December since 1931 for the large stock indexes and pushing the NASDAQ Composite and Russell 2000 into a bear market, defined as a drop of more than 20 percent from the 52-week high. (The S&P 500 and Dow are off 17.5 percent and 16.3 percent from their highs.) Stocks are on track for their worst year since 2008, but here’s a reminder to soothe investors: from March 2009 until its peak on September 21, the S&P 500 surged 333 percent.