Get Ready for a Shutdown Rally

Congress failed. The government shutdown begins now.

And the markets? Futures are slightly higher, of course.

Amid the political posturing and nonstop media coverage, stocks remain surprisingly stable in the aftermath of the first government shutdown in more than 17 years. What gives?

To find a helpful answer, you need to ignore the self-serving politicians. Instead, turn back the clock to see how the market reacted during the 1995-1996 shutdowns.

Initially, the broad market reacted much like we’re seeing right now (and leading up to the fiscal cliff, for that matter). According to data from MarketWatch, the S&P 500 dropped 3.7% in the period leading up to the ’95 shutdown. But after the shutdown, the market rallied 10.6%.

Chart showing the trend of the S&P 500 during the December 1995 government shutdown

“Ironically, the market’s action in 2013 has been compared to the market’s action in 1995 quite a bit this year, even without the government shutdown parallel,” explains Bespoke Investment Group. “The first five months of this year tracked 1995 very closely. Since June, the S&P hasn’t been able to keep up the pace of gains that it saw in 1995, so the correlation isn’t as high as it was, but the patterns remain similar.”

It’s never different. The fear of a shutdown was already priced into stocks. That’s why you aren’t seeing a swoon today as the shutdown takes effect…

But enough with this nonsense. We need to move on to more pressing issues. The broad market is at an important juncture right now, shutdown or no shutdown. The S&P has dropped seven of the past eight sessions. While it would be overly dramatic to say this is a do-or-die moment for stocks, we are going to need to see buyers step in soon if a fourth-quarter rally is going to materialize.

Greg Guenthner
for

Ed. Note: The next major move in the stock market will come sooner or later. The question is, will you be prepared for it? The Rude Awakening can help… Every morning the Rude sets the record straight on the day’s market moves… and how best to position yourself to profit. It’s an honest, unfiltered look at the markets at large, and it is completely free. Sign up today, and start getting the full story.