In One Chart: Here’s how the stock market has handled past government shutdowns

If the U.S. government shuts down this weekend, will the stock market’s nearly uninterrupted march higher also come to a close?

This question was raised Wednesday, when President Donald Trump mentioned the possibility of a shutdown over the coming week, an event which most Wall Street analysts have argued is unlikely.

A shutdown “could happen” Trump said, a day before he prepares to meet with Senate Minority Leader Chuck Schumer and House Minority Leader Nancy Pelosi to discuss funding the government and immigration. Democrats, as well as some Republicans, have suggested they may not vote for government funding without protections for young immigrants known as “Dreamers,” who are currently protected by an Obama-era program that expires in March.

Federal government operations are funded through Friday, and unless there is a deal to extend funding, services would partially shut down. Such an outcome would add another element of political uncertainty to a market that is already overflowing with it—most notably with Special Counsel Robert Mueller’s investigation into potential Russian meddling in the 2016 presidential election, which caused some dramatic but short-lived gyrations in Friday’s session.

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However, past shutdowns haven’t always corresponded with significant stock-market selloffs. Data reveals that markets have shown modest weakness during shutdowns, with the S&P 500 SPX, -0.01% falling an average of 0.6% over the period of the closure, according to data from LPL Financial. The benchmark index was only positive in 44.4% of the 18 shutdowns going back to 1976.

Stocks showed little concern over Trump’s warning on Wednesday, ending mixed with the Dow Jones Industrial Average DJIA, -0.16%  ending sland the S&P higher by about 0.1% on the day and the Nasdaq Composite Index COMP, +0.21%  up 0.3%.

A 0.6% retreat from current levels would hardly be catastrophic for equities, as all three major indexes are within 2 percentage points of record levels. However, the particular circumstances of the current government, as well as today’s investing environment, could mean the market is more vulnerable than normal. Equities have seen little in the way of volatility or pullbacks throughout 2017, going a historically long time without retreating even 3%. It may not take much to return volatility to markets, and with valuations stretched by many metrics, investors could be looking for an excuse to take profits.

For one thing, the Republican party controls the White House and both houses of Congress. The last time the federal government shut down with one party in control—no fewer than five shutdowns during Democrat Jimmy Carter’s administration—the impact on markets was more severe.

In those five instances—three of which occurred in 1977, with an additional one in each 1978 and 1979—markets were weaker in four of them, including a 4.4% drop during an 11-day closure in 1979.

A shutdown’s lasting market effect also remains unclear, but recent examples support the bulls. The S&P 500 rose during the past three shutdowns, suggesting “markets look past Washington’s squabbling, regardless of the length of a shutdown,” said Ryan Detrick, senior market strategist at LPL Financial.

Detrick offered those comments earlier this year, during another shutdown showdown, during which Trump tweeted that the country “needs a good ‘shutdown’ in September to fix mess!”

In the most recent closure, which lasted for 16 days in 2013 as conservative senators attempted to defund then-President Obama’s health-care program, the S&P 500 gained 3.1%, the best return of any shutdown in LPL’s data set.

A shutdown amid Republican control of the executive and legislative branches of government could underline the difficulty of passing major legislation, something investors are particularly attuned to right now, with recent market gains largely attributed to optimism over corporate tax cuts, which won passage in the Senate over the weekend.

Despite Trump’s remarks, the likelihood of a shutdown remains unclear. Republican congressional leaders have signaled that they want to head off a shutdown, and the Associated Press reported that House Republican leaders unveiled a short-term plan over the weekend to avert a shutdown and keep the government open through Dec. 22.

Of course, if that plan comes to pass, it would simply mean that Wall Street has to confront the same uncertainty in a couple of weeks.

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