U.S. Park Service officer P.G. Carroll stands in front of closed signs at the Lincoln Memorial in Washington DC on Nov. 15, 1995, during a shutdown of the federal government.(Photo: Charles Tasnadi, Associated Press)
NEW YORK - How vulnerable is your stock portfolio if the fiscal brinkmanship in Washington spins out of control? It's tough to quantify the downside risk with precision, but history can serve as a guide.
First, let's quickly outline the risks of the current fiscal saber rattling.
If a shutdown occurs, it's not likely to cause much long-term damage to the economy or stocks unless it drags on for weeks or more, which is unlikely. Each week the government is shut down, quarterly economic growth will be reduced by just 0.1 percentage points, according to a report by Michael Gapen and Michael Gavin of Barclays.
Not raising the debt ceiling, however, would likely be "far more destabilizing," they say. It would require an immediate cut in government spending equal to more than 4% of GDP, or comparable in size to the "fiscal cliff" hit. But spending cuts would not rule out a default. In this more bearish scenario a recession is possible, as are "significant disruptions" in markets.
So how have stocks reacted in prior scenarios?
• 1995-96 government shutdown. The Standard & Poor's 500 fell 3.7% during the government shutdown period that ran from mid-December 1995 to early January 1996, according to Sam Stovall, chief equity strategist at S&P Capital IQ. The good news is stocks quickly rebounded after the government got back to work, rising 10.5% in the subsequent month.
• Debt ceiling fight in summer 2011. Stocks took a big hit despite Congress' last-minute deal announced by President Obama on July 31. The damage from political dysfunction was already done. From the time Moody's Investors Service, a credit-rating agency, put the USA's triple-A rating on "negative watch" on July 13, to the actual downgrade from Standard & Poor's on Aug. 5 and through the Aug. 10 low, the Dow Jones industrials tumbled 1,700 points, or nearly 14%. The Dow didn't make back those losses until five months later in January of 2012.
• 'Fiscal cliff' fears December 2012. After Obama won a second term in November, Wall Street shifted its focus to the automatic government cuts and tax hikes, dubbed the "fiscal cliff," that were looming at year's end 2012. From the Dec. 18 high to the Dec. 28 low, the Dow fell more than 400 points, or 3.1%. But after Congress averted the cliff and softened the fiscal blow with a Jan. 1, 2013, deal, the Dow soared more than 300 points on the first trading day of 2013, wiping out all its losses.