Shutdowns and Snapbacks: What History Says About the S&P 500

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Editor’s Note: This analysis was originally published on September 25, when a government shutdown appeared imminent. At the time, I argued that such an event could offer a compelling buying opportunity for investors with patience and a long-term horizon. Historically, the S&P 500 Index has gained an average of 2.7% during shutdowns and delivered a 12-month return of approximately 21% thereafter. The Nasdaq Composite and Russell 2000 have exhibited similarly resilient post-shutdown performance.

Now, with recent developments in Washington suggesting the government may soon reopen, it’s an apt moment to revisit that thesis. Since the closure began on October 1, the S&P 500 has already advanced 1.8%—leaving room, if history is a guide, for a potential 19% gain over the next 11 months. That context underscores why this original write-up remains timely and relevant…

Don’t Fear a Government Shutdown, Invest In It

·       Wall Street’s increasingly worried about a government shutdown on October 1.

·       Investors are concerned such an outcome will weigh on stocks.

·       Since 1990, stocks have tended to see solid gains following shutdowns.

Get ready for the fearmongering to take off…

With major stock market averages hovering near their highs, the doomsday crowd is getting louder. For months, they’ve been warning of a collapse. They keep insisting inflation will surge and the Federal Reserve won’t have room to cut interest rates. Yet that scenario still hasn’t materialized.

So now, the bear camp is hunting for its next imminent peril. Lately, they’ve latched onto a new narrative: a looming U.S. government shutdown.

Here’s the setup. The government’s fiscal year ends next week on September 30. House Republicans passed a continuing resolution to keep the government funded through November 20. That gives them more time to hammer out a broader deal. But getting it through the Senate is a whole different ballgame.

Unlike the House, which runs on a simple majority, the Senate needs 60 votes to pass funding. The GOP holds 53 seats, meaning seven Democrats would need to cross the aisle. So far, they’ve rejected the House’s proposal. And based on recent messaging from the White House, it doesn’t sound like the administration is open to any of the Democrats’ ideas to keep the government running.

Currently, Congress is out of town and won’t return until Monday, September 29. That leaves little time to sort out the gridlock. As a result, the negative nellies are spinning this into the next disaster scenario. They claim D.C. paralysis will crush the economy and send the stock market tumbling. Yet history tells a different story. If we look back at past shutdowns, we find they rarely trigger market selloffs. In fact, shutdowns typically lead to stock market booms.

But don’t take my word for it, let’s look at what the data’s telling us… 

Government shutdowns have been going on for some time. But it wasn’t until 1980 when a decision by then Attorney General Benjamin Civiletti changed how they were orchestrated. He stated that until Congress agreed on a spending bill, the federal government couldn’t operate. But it wasn’t until a decade later, in 1990, that the decision was strictly adhered to, and funding gaps caused government shutdowns.

Considering we’re facing a similar scenario today, I decided 1990 would be the best place to start for relative comparisons. I went back and searched for the dates for every shutdown that has taken place since. I found there were seven instances. But I excluded one shutdown that lasted only a few hours, leaving just six.

I found the average shutdown lasted 14 days. The longest, which took place in late 2018/early 2019, spanned 35 days. Not only that, but each instance tended to take place right around new stock market highs, much like today.

For this scenario, I expanded the results beyond the S&P 500, including the Nasdaq Composite Index and Russell 2000 as well. That way we get a better sense of how the major stock market averages performed. I used the closing price from the night before the shutdown through the close on the day it ended. And if the situation was resolved on a weekend, I used the closing price on the first day of trading immediately following. In addition, I ran the results on a total return basis (dividends reinvested) for the following 12 months, to observe follow-through from investors.

Check out the performance of the S&P 500…

I laid out the above table with the results from each shutdown. You’ll notice the columns to the right show the index’s performance during the dates mentioned as well as the 12 months following the start. At the bottom, I arrived at an average return by combining them and dividing by six. I based the success rate on the number of times a positive outcome occurred.

As you can see, the S&P 500 typically experiences a gain of 2.7% while lawmakers resolve their differences. In fact, the gauge has experienced a positive outcome each time. And, one year later, it continued to rally five out of the six times with a 21% return. That compares to the 9.5% average annualized return since 1928.

Now look at the results for the technology-heavy Nasdaq Composite…

We can see the outcomes are similar. During the shutdown dates, the Nasdaq averaged a 2.4% return with an 83% success rate. And 12 months later it typically tacks on another 23.6% compared to its average annual return of 10% since its inception in 1971.

And lastly, check out the performance numbers for the small-cap-focused Russell 2000…

Once again, the likelihood of a gain is high. According to the results, the Russell performs the best near-term, averaging a 3% gain during a shutdown. And while it had the weakest performance a year later, increasing by a total of 15.5%; that’s well above the annual average gain of 8% since 1984.

So, as I said at the start, the stock market bears are trying to use this situation to paint their next dire scenario. And, as the deadline gets closer, the warnings are likely to grow louder. Because, they’re trying to get you worked up into a panic.

Yet based on the data we just looked at, the opposite should be true. And if we do experience a shutdown next week, it’s likely to lead to a steady rally for stocks.

If you'd like to see how I'd invest, check out the BentPine Growth Portfolio here.

Five Stories Moving the Market:

CoreWeave, one of the top providers of cloud-computing services for artificial-intelligence firms, saw revenue more than double in the third quarter, reflecting an expanding stable of partnerships with some of the biggest names in AI; CoreWeave’s revenue backlog rose to $55.6 billion as of the end of September, in-line with consensus expectations – WSJ. (Why you should care – the company had to lower 2025 guidance due to pushing out the delivery of a project from the end of this year into next)

President Donald Trump said the U.S. was getting “pretty close” to a trade deal with New Delhi and that “at some point” he would reduce the tariff rate on Indian goods – Bloomberg. (Why you should care – an agreement between the two sides would boost the potential for economic growth while weigh on the outlook for inflation)

Federal Reserve Bank of St. Louis President Alberto Musalem (hawk, voter) said officials need to approach additional interest-rate cuts with caution; Musalem said he expects the U.S. economy to bounce back strongly early next year – Bloomberg. (Why you should care – Musalem feels that interest rates are less restrictive and approaching the neutral level, where policy neither hurts nor helps economic growth)

Federal Reserve Bank of San Francisco President Mary Daly (neutral, non-voter) said policymakers must be mindful of the lessons learned from 1970s inflation growth as well as those from 1990s productivity gains; Daly said she’s on the alert for the possibility that increased productivity from the adoption of artificial intelligence could allow for faster economic growth without pressuring inflation – San Fran Fed Blog. (Why you should care – Daly doesn’t want to choke off the potential growth benefits from evolving technology advances by keeping interest rates too high for too long)

Japanese Prime Minister Sanae Takaichi said she would work on setting a new fiscal target extending through several years to allow more flexible spending, essentially watering down the country's commitment to fiscal consolidation; the new prime minister also renewed calls for the Bank of Japan to go slow on interest rate hikes – Reuters. (Why you should care – the statements will likely encourage momentum investors to short the yen and invest the proceeds in risk assets like stocks)

Economic Calendar:

China – New Yuan Loans for October

Japan – Bank Lending for October

U.K. – Average Earnings for September (2:00 a.m.)

U.K. – Unemployment Rate for September (2:00 a.m.)

Sweden – Monetary Policy Meeting Minutes (3:30 a.m.)

Eurozone – ZEW Economic Sentiment for November (5:00 a.m.)

U.S. – NFIB Small Business Optimism for October (6:00 a.m.)

Treasury Auctions $95 Billion in 6-Week Bills (11:30 a.m.)

Treasury Auctions $69 Billion in 2-Year Notes (1:00 p.m.)

U.S. - American Petroleum Institute Crude Oil Inventory Data (4:30 p.m.)

Fed’s Barr (Board Member, Voter) Speaks (10:25 p.m.)