The stock market has declined recently, mostly due to the news about the government shutdown in Washington. The Dow Jones Industrial average and the S&P 500 hit its all-time highs on September 18 and have declined since then. In the period from September 18 to October 9, the S&P 500 shed about 83 points, a drop of almost 5 percent.
On October 10, news came out that the government may be near some kind of a deal and the market shot up more than 2 percent in one day.
The Dow rallied more than 300 points and the S&P 500 moved up 36 points. For you statistically minded people, those moves were greater than three standard deviations.
This kind of price movement is a very good reminder that the stock market can be volatile in the short term. These government shutdowns are nothing new; they have occurred seventeen times since 1975.
A long-term shutdown would certainly impact the economy, dropping the GDP by as much as 1.5 percent according to Mark Zandi, chief economist at Moody’s.
However, a look at the past tells us that the stock market is typically not too concerned about government shutdowns, the assumption being that eventually some kind of a deal will be reached and we’ll return to business as usual.
The average shutdown has been 6.4 days, and only eight of the shutdowns have lasted more than three days. From November 13 to November 19, 1995, the S&P 500 posted a gain of 1.3 percent.
In the next shutdown from December 15, 1995, to January 6, 1996, the market was relatively flat with a small increase of 0.1 percent. If you take a look at all 17 of the shutdowns, the market has declined by an average of minus-0.7 percent.
While the government can create some short term volatility for investors, over the longer term, market performance is determined by factors like corporate earnings and economic growth.
The debate over the so called “fiscal cliff” talks created some market volatility and the market shot up rapidly as soon as agreement was reached.
On January 2 of this year, the Dow rose by 308 points when the “fiscal cliff” deal was reached, and that was the second largest gain so far in 2013, behind the 324 point gain on October 10 when the news came out that a deal in Washington may be within sight.
Partisan bickering in Washington can create some short-term volatility for investors, but the market has a tendency to bounce rapidly once an agreement is reached.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.