Is a Government Closure Bad for Stocks?


Would closure of the U.S. government be a bad thing for stocks?

During the 1995 government shutdown from Nov. 14 to Nov.19, the S&P 500 (SNP:^GSPC) gained 1.3%. And just a few weeks later, U.S. stocks (NYSEARCA:VOO) repeated that feat. During the 1995-96 shutdown from Dec.16 to Jan.6, the S&P 500 recorded a small gain of 0.05%.

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In retrospect, the government shutdown had little negative impact on stock prices. Six months after the first shutdown, the SPDR S&P 500 ETF (NYSEARCA:SPY) was ahead 14.57% and after the second shutdown it was ahead by 9.51%.

The recent history of government shutdowns, as the 1995-96 episodes illustrate, is their tendency to be short-lived.

Nevertheless, any kind of government shutdown this time around would be disruptive and force closures to IRS call centers, national parks, and delays for passport renewals along with veterans' disability claims. The economic impact would be less certain and fantastic claims of a government closure erasing 0.25% off national GDP are wild guestimates.

A government shutdown is merely the symptom or side effect of other profound problems.  Political instability coupled with invasive central banker monetary stimulus has created deep structural problems that financial markets will have to reckon with. This tops our latest mega investment theme report among major global investment trends.

In our just released October ETF Profit Strategy Newsletter, we also highlighted muted volatility as a crucial discrepancy and opportunity. We wrote: 

"As we've consistently noted, the S&P 500 has been making new highs, yet the VIX (CBOE:^VIX) hasn't bottomed. This is a rather large discrepancy and the previous times stocks have made new highs without the VIX hitting new all-time lows, it warned of a short term market top."

Earlier this year, we rode the spectacular 47% gain in the VIX (NYSEARCA:VXX) from early May to June 24. Per our June newsletter, we bought VIX JUL 13 call options at $370 and we sold half that position at $680 for a one-month 84% gain. Then, via our 7/3 alert, we sold the remaining half of this position on 7/5 at prices near $450.

The outcome of the next debt ceiling negotiation is arguably more important to financial markets. During the July/August 2011 debt ceiling brawl, the S&P 500 declined 16.5% in just a matter of weeks. Although stocks later recovered, the ugly performance illustrates that bad things can happen fast when the market loses confidence. 

The ETF Profit Strategy Newsletter uses a combination of fundamental/technical analysis, sentiment, market history, and common sense to be on the right side of the market. Since the beginning of the year, 78% of our time stamped ETF picks have turned a profit and a 525% gain was our biggest winner. (through 6/30/13)

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