The Impact of the 1995-96 Government Shutdown

Will the market hold up as well as it did last time? That is the near-term question on the minds of some investors as the partial shutdown of the U.S. government drags on. Stocks bounced back quickly from the 3-week gridlock that occurred in 1995-96. Will that be the case in 2013?

In some ways, things weren’t that different. In late 1995, the economy had been expanding – similar to today. Stocks were on a tear: a powerful bull market had begun in 1992, and it was far from over. Between 1992 and 2000, the Dow rose about 7,800 points. In fact, it gained almost 3,000 points (about 75%) between January 1995 and March 1997.

There were actually two shutdowns in late 1995: one lasted from Nov. 14-19, the other began on Dec. 15 and lasted until Jan. 6, 1996. How did stocks respond? The Dow dropped 3.5% during the December to January shutdown, yet rose 10.1% in the month afterward. Growth also took a hit as our GDP fell to 2.7% in Q1 1996, but by Q2 1996 the economy was expanding at better than 7%.

In other ways, things differed considerably. The jobless rate was about 2% lower at that time, however – and the economy was growing much more impressively than it is today. Baby boomers were headed into their peak earning years, with retirement a distant thought. Even the dot-com boom was in its infancy; fax machines were ubiquitous in offices, not routers.

Many analysts think that a 2-week shutdown could put a 0.3-0.4% dent in Q4 GDP. The final federal government estimate of Q3 growth was 2.5%, so that kind of impact would hurt in 2013 much more than it would have in 1995.

This could give you a buying opportunity. The current Wall Street slump does offer investors a chance to pick up some shares more cheaply, with the real possibility of a rebound. Since 1976, the federal government has shut down on 17 different occasions; there were budget deadlocks lasting 10 days or longer during both the Ford and Carter presidencies, in fact. In the last 37 years, the S&P 500 has dipped an average of 1.4% during shutdowns lasting five days or less and an average of 2.5% during impasses lasting 10 days or longer.

A bad month or quarter shouldn’t derail your long-term strategy. If the shutdown does last two or three weeks, stocks and the economy will almost certainly feel a significant pinch – but probably not enough to waylay the current bull market or halt the U-shaped economic recovery in progress. Patience can help you stay the course in the face of the headlines.