October 1, 2013

Buying the Shutdown—Searching for Alpha for October 2013

Risk is like dark matter, the material that theoretically makes up a large portion of the total mass of the universe. Although it cannot be seen, scientists can observe its effect on celestial objects such as stars and planets. It is only when black matter’s effect on certain forces is isolated that scientists are able to glean more information about this mysterious substance. 

Similarly, even though there may be myriad forces pushing and pulling on stocks at any given time, when one looks at how stocks react to scenarios on a one-off basis, the impact of macroeconomic forces become more clear.

According to Time magazine, “stocks have risen during past government shutdowns. The December 1995-January 1996 shutdown, for instance, did nothing to stop the then-gaining-momentum 1990s bull market. Stocks rose during the shutdown, and in the six months following the shutdown, the market was up nearly 6%. Stocks did fall during the government shutdown of the fall of 1978, which at 19 days was, after 1996, the second largest shutdown in the past three decades, but only by 2%. And in the half year following that shutdown the market was up 1.2%.”

A lot has been thrown at the market in the last few years, and every time, it manages to get off the mat.  I don’t think the government shutdown will be any different.

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