Despite the ongoing government shutdown, historical data shows the S&P 500 has remained resilient, with strong average returns following past shutdowns.
Today marks the third consecutive day of the U.S. federal government shutdown. As the October 1st deadline passed without a congressional resolution due to a lack of agreement on key budgetary provisions, the Anti-Deficiency Act was triggered, halting non-essential government operations. The shutdown stems from a partisan divide over whether to extend the Affordable Care Act (ACA) subsidies and reverse prior Medicaid cuts, with negotiations between both parties in congress at a stalemate.
In a surprising show of strength, the healthcare sector has pushed the market higher despite uncertainty surrounding the government shutdown. The Healthcare Sector SPDR ETF (XLV) surged more than 6% over the past week, with many of the sector’s largest constituents posting high single-digit and double-digit gains. The rally suggests that investors are increasingly pricing in the likelihood of renewed federal support for these programs, however, depending on the outcome of ongoing negotiations, the sector could either build on these gains or retract to previous levels. Despite the recent strength in the sector, healthcare remains an unfavored and underweighted sector in our DALI (dynamic asset level investing) sector rankings.
While many Nasdaq Dorsey Wright users follow a systematic, model-driven approach to investing, a significant portion of users also benefit from an active management approach—continually seeking technically sound opportunities to enhance client portfolios. With the current U.S. federal government shutdown in mind, active managers may be evaluating whether the shutdown could impact the performance of domestic equities. To provide some context, we conducted a study of every government shutdown since 1980, focusing on the S&P 500’s (SPX) performing leading up to and after each event. The goal was to assess whether markets tend to react negatively to uncertainty surrounding shutdowns or whether they remain resilient. As shown in the chart below, the data reveals that the S&P 500 has shown little to no adverse reaction in the weeks leading up to each shutdown, suggesting that the market has viewed these events as temporary disruptions.
When examining forward returns in the months following each government shutdown, the chart below demonstrates S&P 500’s impressive results. The average one-month return stands at 3.48%, translating to an annualized return of over 40%. Equally impressive is the six-month average return of 12.14%, or more than 25% annualized, highlighting sustained strength well beyond the immediate aftermath of each event. Additionally, the percentage of positive returns—commonly referred to as the “hit rate” — is an impressive 80%, demonstrating the reliability of these outcomes. As the S&P 500 continues to reach new all-time highs, this historical performance provides yet another reason to stay the course and remain invested in equities, particularly in the market’s strongest segments.
