The U.S. government began shutting down Tuesday for the first time in 17 years. Considering how dysfunctional our federal government has become, a time-out in Washington may not be such a bad thing.
And if history is a guide, the shutdown may prove to be a buying opportunity for stock investors.
The media have drawn plenty of parallels between the current budget battle and the previous one in November and December 1995.
That fiscal fight, between Bill Clinton and Newt Gingrich, played out similarly. Notwithstanding some volatility, the S&P 500 Index actually rose during two separate shutdowns in November and December 1995.
In fact, stocks tend to perform better than average in the aftermath of a shutdown.
Since 1976, there have been 12 fiscal fights that resulted in a government shutdown, most of them brief. According to data from Bloomberg, the S&P 500 rose 11 percent on average in the 12 months following a shutdown, compared with 9 percent in all other 12-month periods.
|History has shown that stocks tend to perform better than average in the aftermath of a shutdown.|
After the 1995 standoff between Clinton and Gingrich, the benchmark index surged 21 percent over the next year. To be sure, there has been some short-term pain inflicted on markets during past budget battles, most recently August 2011.
Although a shutdown was avoided, the U.S. government lost its triple-A credit rating as a result of that standoff, and the S&P 500 plunged nearly 20 percent during a two-month period. Still, the index climbed 25 percent in the 12 months that followed.
Even if this shutdown is relatively short, like most others have been, another fight over raising the $16.7 trillion debt ceiling looms ahead. So the timing is crucial.
It’s worth noting which sectors have historically performed best in the fourth quarter and are faring well now in spite of this uncertainty.
As you can see in the chart above, consumer staples, technology, health care and industrials have consistently outperformed the S&P 500 Index during the last three months of the year since 1980, according to data from Bespoke Investment group.
But taking a closer look at how these sectors have been behaving in recent months reveals a very different picture …
For instance, although consumer staples have typically led other sectors, rising 5.3 percent on average since 1980, the industry has badly lagged the S&P 500 in recent months.
As you can see in the chart above, consumer-staples stocks have been range-bound since early this year (upper panel) even as the S&P 500 Index has climbed to new highs. The sector has trailed the index in overall performance since April (lower panel), which means staples may not be prepared to lead any fourth-quarter rally.
Industrial stocks are a different story. In the chart below, you can see they have been leading the S&P 500 this year.
After a brief pullback in performance during the May-June correction, the industrial sector rebounded to new highs while outperforming the S&P 500 in 2013, up 24.7 percent. Industrial shares may continue outperforming the index during the fourth quarter if history repeats. Since 1980, the industrial sector has gained 4.7 percent on average during the last three months of the year.
Granted, the stock market has been spooked many times during October, so we’re not out of the woods just yet, especially with the debt-ceiling drama ahead. But stocks may quickly overcome those concerns to post decent year-end gains, especially with an improving economy.
If so, certain industry groups are poised to outperform, including industrials and also technology and health care. These are the stocks and sectors I’ll be watching for new buying opportunities.