The media loves negative headlines. Bearish articles on average produce 5x as many pageviews as bullish articles. So it comes as no surprise that some media outlets predict that the upcoming U.S. government shutdown on April 28 will push stocks down.
Nothing can be farther from the truth.
If Congress cannot agree on a spending bill this week, the U.S. government will likely shutdown on April 28 at midnight.
The problem with this spending bill is that Trump wants to include funding for a border wall, which all Democrats and some Republicans don’t want. That’s why this spending bill isn’t being passed right now.
What history shows us
The U.S. government really likes to shutdown. The U.S. government likes to put on a facade of being “fiscally responsible” via the debt ceiling. This is a joke. Whenever the government’s debt hits the debt ceiling, the debt ceiling inevitably gets raised. There will be Congressional debates, threats etc but eventually the debt ceiling ALWAYS gets lifted. No politician is going to put the U.S. into default. They’d all rather kick the can down the road and leave that mess to their successor.
As a result, the U.S. government has shut down many times in the past 50 years, and each time it reopened within a matter of weeks.
During those government shutdowns, the U.S. stock market went up more often than it went down! 2013 was a prime example.
This is because the U.S. economy is primarily driven by the private sector and not the public sector. Thus, a government shutdown has a negligible impact on the U.S. economy, which is what drives stock prices in the medium-long run. And many investors already know that a government shutdown is a joke, so they’re not really scared of one.
For example, the U.S. government shut down from October 1-16 2013. During that time, the S&P did not fall at all! The economy continued to grow nicely and fears that the shutdown would cause stocks to crash were unfounded.
Could stock prices fall this time?
Sure. Stock prices don’t always rise during government shutdowns, but they rise more than they fall.
If the S&P falls during this government shutdown, it won’t fall because of this shutdown. It will fall because most short term fluctuations in the market are random.
But bearish investors need to be cautious. The 2 biggest factors that impact stocks in the medium-long run are:
- The state of the economy.
- Corporate earnings.
The U.S. economy is improving nicely right now. But more importantly, the rate of corporate earnings growth is accelerating. Forward earnings-per-share for the S&P 500 is growing at roughly 0.3% per week! This is because energy companies are finally recovering from the 2014-2016 downturn in oil prices, so earnings in the energy sector are on the rise. The following chart from Yardeni illustrates forward earnings.
Earnings insights from Factset agree with this observation.
- Q1 2017 earnings season (released in April 2017) is mostly over. More than 3/4’s of companies have beat their earnings expectations. This has been a very good quarter indeed.
- Earnings are growing at a 9-10% annualized rate. This is the highest growth rate since 2011!
So if you ignore all the political factors, the U.S. stock market is on a clear path to medium-long run gains.