5 market lessons from past U.S. government crises
5 market lessons from past government crises
Here’s how markets reacted to past budget and spending crises
As investors fret about a potential government shutdown and
a debt-ceiling fight, strategists have turned to past government crises
for hints on how markets could react this time around. One takeaway is
that a debt-ceiling scare likely would roil markets more than a
government shutdown. At left, Senate Majority Leader Harry Reid, a Democrat, and House Speaker John Boehner, the lead Republican.
A government shutdown might not be that bad for U.S. stocks, according to a note put out during the past week by Sam Stovall, chief equity strategist at S&P Capital IQ. “History says (but does not guarantee) that while Congress may force the S&P 500
SPX
-0.57%
to endure another 5%+ drop, it may end up as a gift to investors,” he
wrote. He points out that the peak-to-trough decline associated with the
shutdown of the U.S. government between Dec. 16, 1995, and Jan. 6,
1996, involved an S&P 500 drop of 3.7%, followed by an advance of
10.5% in the subsequent month. Lawmakers must reach an agreement by
midnight Monday to avoid a shutdown.
The battle over raising the debt ceiling is truly worth worrying about,
according to a note from Barclays’ Michael Gapen and Michael Gavin. The
S&P 500 sold off sharply during the debt-ceiling uproar in summer
2011. During that crisis, S&P issued a negative rating watch for the
U.S. on July 14, then downgraded the nation’s credit rating to AA+ from
AAA on Aug. 5. “Historical experience seems to support the view that a
short-lived government shutdown would be something that the economy and
financial markets could withstand with limited damage. Renewed anxiety
about a U.S. government credit event would likely be immeasurably more
disruptive,” Gapen and Gavin wrote. The Treasury Department has said lawmakers must act by Oct. 17 or it will run out ways to keep paying all its bills.
Despite fears about the fiscal cliff in December 2012, the S&P 500
just pulled back moderately. “The market reaction to the temporary
impasse was mild, and once the impasse was resolved, U.S. equity markets
resumed their strong recovery, even though the resolution involved
higher taxes
and a substantial part of the feared fiscal drag,” Gapen and Gavin
wrote. The Barclays strategists compared the market reaction to the
fiscal-cliff issue to the limited market reaction to the 1995-96
government shutdown. They said investors treated the more recent “event
as a temporary setback of limited significance.” The fiscal cliff
referred to the threat of a severe hike in taxes and a drop in
government spending in 2013.
If you want more evidence that a government shutdown shouldn’t be that
frightening, Goldman Sachs analysts have provided a look at options
hedging for stocks that are highly exposed to government spending. They
found “complacency” around these stocks, which include health-care and
defense names. “Fear priced into options on these stocks dropped over
the past few months to new lows vs. SPX options,” the Goldman analysts
wrote in a research note. They also emphasized that such stocks haven’t
underperformed the S&P 500 over the past month, “suggesting that
recent events have not caused investors to re-price expectations.” A Tell blog post during the past week offered more details on this take.
What about other assets? Gold, often called the ultimate safe haven,
rallied sharply during the government shutdown from Dec. 16, 1995, to
Jan. 6, 1996. But that doesn’t automatically mean the precious metal
will see buying from the uncertainty created by a shutdown, as MarketWatch’s latest Commodities Corner column
noted. The adjacent chart shows how gold actually dropped another
shutdown around that time, one that ran over several days in
mid-November 1995.
