With the possibility of a government shutdown looming, it's important to consider how history can guide us in understanding the potential impact on investments.
According to RBC Capital Markets, government shutdowns lasting at least 10 days have occurred about once every seven years since 1976, making them as common as recessions. In the lead-up to the last seven shutdowns, the S&P 500 has experienced a median decline of 10.2%. Currently, the index stands at 4,271, having already declined about 7% from its peak in July 2023. If we follow historical trends, a 10% drop would place the index around 4,100. However, it's worth mentioning that the median market drop during (as opposed to leading up to) the previous shutdowns was only 2%.
While a shutdown may cause some disruptions, it may be comforting to know that spending on essential services such as law enforcement and public safety will continue. Additionally, social security payments will still be made, and interest on US Treasury debt will be paid on time by the Treasury.
The good news, according to RBC, is that markets have often rebounded strongly once the government reopened. In the 12 months following a government shutdown lasting at least 10 days, the S&P 500 has experienced a median gain of 18.9%.
For us and our clients, who have long-term investment plans, it's important to avoid getting caught up in the noise of current events and crises, whether real or imagined. As Warren Buffet’s wise partner Charlie Munger once said, "The first rule of compounding is to never interrupt it unnecessarily."
Successful investors continuously ACT on their plan, while failed investors continually REACT to short-term market moves, current events, and emotions.
Wishing everyone a bright and pleasant Fall season!