The U.S. government shutdown has highlighted two unavoidable and predictable events. The first is pretty obvious, the other maybe not so much.
For starters, the U.S. government shutdown means as many as 800,000 of the country’s 2.1 million federal workers could end up being furloughed (temporary, non-duty, non-pay status). Not surprisingly, members of Congress—those paid by taxpayers to determine their fate—will continue to pull in a hefty salary.
Thanks to their unpopularity, U.S. government shutdowns don’t last very long. The last U.S. government shutdown took place between December 15, 1995 and January 6, 1996—a span of 21 days, the longest on record.
The first U.S. government shutdown occurred back in 1976, during the Ford administration, and lasted 10 days. During the Carter years, U.S. government shutdowns averaged 11 days. And the six shutdowns that occurred during President Regan’s two-term tenure averaged about two days.
No matter how long it lasts, it’s more than a simple economic and financial inconvenience. Aside from the 800,000 federal workers who unfortunately take an immediate and direct hit, it has the potential to negatively impact the vast majority of Americans on many, many levels.
Sadly, Congress knows how a U.S. government shutdown will affect its citizens and continues to act with moral impunity—compromising only after the fact, all the while congratulating each other for doing what they were voted in to do.
Since history has a tendency of repeating itself in Washington, Wall Street knows all too well how a government shutdown will affect the markets. It’s calling the U.S. government’s bluff, and is happy for the buying opportunity.
Despite the fact that the S&P 500 is near all-time highs, they haven’t really reacted all that negatively to the proposed U.S. government shutdown. Granted, the S&P 500 dipped over seven of the eight days leading up to the U.S. government shutdown, but it was pretty marginal.
Rational investors know there will be plenty to cheer about in the long term and have been buying into the dips—so much so that the S&P 500 was actually up almost one percent on the day the U.S. government announced a shutdown.
That’s because data shows the S&P 500 Index has risen 11% on average in the 12 months following a U.S. government shutdown; that compares to an average return of nine percent over 12 months. In every single instance, the S&P 500 was higher by the end of the next two years. (Source: Taborek, N. and Kisling, W., “U.S. Government shutdown: Why it’s a good thing for investors,” National Post web site, October 1, 2013).
Those investors who are certain history will not repeat itself and think there is a good chance the markets will experience some sort of correction might want to consider an exchange-traded fun (ETF) that shorts the S&P 500 like the ProShares Short S&P500 (NYSE/SH).
In the near term, with third-quarter earnings season just around the corner, investors betting on a quick resolution to the U.S. government shutdown and a strong rebound on Wall Street might want to consider ETFs that are bullish on the S&P 500, like the SPDR S&P 500 ETF Trust (NYSE/SPY).
If you believe history is on your side, it might make sense to buy on weak investor sentiment and take advantage of any U.S. government shutdown sell-offs.
~ by John Paul Whitefoot, BA
This article was originally published at Daily Gains Letter