Investors breathed a sigh of relief when a government shutdown was averted last week.
But with the speaker of the house ousted and a new 45-day deadline pending, the media is having a meltdown and implying that a longer shutdown is now inevitable.
I’ve even seen headlines predicting a stock market crash 45 days from now as a result.
But let’s suspense with the drama… government shutdowns don’t cause market crashes.
The data is pretty clear on that one.
A government shutdown isn’t likely to have a major impact on your portfolio.
And it doesn’t matter where your allegiances lie, politically speaking.
Historically, there’s nothing better for the stock market than a divided government.
Today, I’ll walk you through the data on that, show you why there is no need to panic, and remind you to stick to the fundamentals.
Don’t Let Politics Dictate Portfolio Management
The fact is, when it comes to U.S. stock market returns, it doesn’t really matter what’s going on in D.C.
Or who’s in power.
Historically speaking, the market has always trended higher.
Forbes recently performed a study looking at presidential cycles from 1946-2020 and the results were clear…
The stock market tends to rise no matter what sort of government the U.S. has in place.
Below are the average annual returns in the market based on the political situation in D.C.
As you can see above the market has performed the best when the government is divided politically.
The 12.9% returns that the Dow Jones posted with a split congress is 35% greater than its 8.3% long-term average.
With that in mind, the craziness that we’re seeing play out in Washington D.C. doesn’t seem that bad, does it?
Government Shutdowns Don’t Break Markets
Data related to past government shutdowns also makes it clear that these events are not something investors should fear.
In the past, the market’s response to shutdowns has been neutral.
There have been 20 government shutdowns since 1976.
And their impact on the market was minimal.
The worst sell-off that we’ve seen associated with a modern government shutdown was a -4% dip in the S&P 500 back in 1979.
And one of the best rallies was in reaction to the longest government shutdown we’ve ever experienced.
In 2018, the government shut down for 34 days and the S&P 500 had a 10.3% rally.
Who would have thought?
And a recent Edward Jones study notes that 60% of the time the stock market was positive 3 months after government shutdowns ended.
Even better, 6 months later, the market was up 70% of the time.
And over that 6-month time period, the S&P 500 was up 7.5% on average.
That’s a really solid return for any 6-month period. So with that in mind, a shutdown may be a bullish sign for investors.
And the historical risk/reward proposition is pretty positive.
Ignore the Noise, Focus on the Fundamentals
A key tenet to our success at Wide Moat Research is being able to ignore the noise that surrounds the market and instead, base our decision-making on fundamental data.
We spend hours sorting through company filings and market stats – past, present, and future – spotting trends that are based on facts, not sentiment.
And when it comes to the dysfunction on Capitol Hill, the data is clearly bullish for investors.
Regardless of the latest lawmaker spat, high-quality companies will keep innovating, taking market share, and ultimately, growing their sales, earnings, and cash flows.
That’s why the market’s trajectory is so positive over time.
Remember, fundamentals drive markets.
Tune out the scary noise and instead focus your attention on blue-chip stocks that continue to provide reliable growth and consistent dividend returns.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
P.S. Although there is no evidence that a potential government shutdown will lead to a stock market crash, there is an area of the market that I am concerned about.
Analyst Stephen Hester, a trusted member of my team, recently made me aware of multiple warning signs in the commercial real estate and banking sector.
If he is even half right about his findings, the artificial intelligence (AI) craze that is currently driving this bull market is about to hit a wall. And the results will be catastrophic for the U.S. economy in the sectors I just mentioned.
In order to prepare you, Stephen and I have put together a special briefing called the AI Ticking Time Bomb. Click here to find out all the details and prepare your portfolio for what’s ahead.