I was reminded of this sorry time this week in the flurry of bearish excitement over the stand-off in Washington over the budget. The 'shutdown of government' may sound like a perfect storm for the stock market. After all, investors hate uncertainty and what could be more uncertain than when the civil service gets frozen as politicians slug out their ideological differences? What's more, Barclays Capital estimates that GDP may shrink by an annualised 0.1 per cent for each week the standstill goes on.
It all sounds very ugly, especially to us Brits as we watch bemused from afar. The good news, though, is that these shutdowns have happened fairly often in the past and without the bottom falling out of the markets. Or at least that's what a set of numbers that I happened upon - http://read.bi/1bn0OnA - seems to suggest.
Since 1976, there have been no fewer than 18 shutdowns lasting from as little as one day to three weeks. The median performance of the S&P during these episodes has been a fall of 0.1 per cent, with slightly greater than even odds of a negative return. The worst drop was 4.4 per cent.
Granted, things seem to worsen in the aftermath of a shutdown. The odds of a negative return in the week afterwards are somewhat higher. But fast forward a month, and you'd hardly know there'd been a problem. There's a two-thirds chance of the S&P 500 rising over this timeframe, with a median gain of 0.7 per cent. After the last shutdown back in 1995-96, the market had rampaged ahead by 4 per cent a month later.
Shutdown, what shutdown?
There is another side to the story, though. Going back over the charts, I notice that half of these episodes came in periods when the market dropped more than 10 per cent. Seven of the nine occurred in the troubled late 1970s and early 1980s. However, I don't believe there's any suggestion that the shutdowns were the cause of those market sell-offs, any more than they were behind the robust gains that accompanied 1980s and 1990s shutdowns.
S&P 1970s shutdowns
For me, the lesson is clear enough: shutdowns are sideshows. The trend of the day holds sway. In the 1970s, the overall trend was downwards, while in the 1980s and 1990s it was upwards. Such weakness as we're getting now is most likely a pullback ahead of yet more new highs in the market. I'd be delighted if the S&P 500 came back to its lower daily Bollinger band and then bounced. It would be a great chance to establish a new long position trade.
Ideal buying opportunity
Cycle hazard on Wall Street
My main worry is that the market does something like it did last autumn, where it suffered a drawn out but modest correction lasting nine weeks, before getting back on track. According to the accompanying chart of the 17-week cycle from Richard Mogey, the world's greatest cycles-analyst, (www.cmffinvestments.com) that's an entirely possible set-up. I would feel better about buying the projected November low than shorting now, though.
