Government Shutdown a 'Plus for the Market'

BOSTON (TheStreet) -- Eric Singer, manager of the Congressional Effect Fund (CEFFX), laughs when he recalls the last government shutdowns in November 1995, during which he sat with a congressman on Capitol Hill.

During the very public battle between then-President Bill Clinton and Speaker of the House Newt Gingrich, expectations were that the stock market would be crushed as Americans lost confidence in the ability of the government. In addition, after threats Gingrich made about refusing to raise the debt ceiling for the Treasury Department, there were fears interest rates would head higher.

Singer says the major networks began scrambling to find video footage of a tangible change in function of the government to show U.S. viewers. The results, Singer says, were unintentionally hilarious.

"Finally, they showed a guy in a station wagon pulling up to Yosemite National Park in the middle of November so he could go camping," Singer says. "That became the video for why a government shutdown is so horrible. That was the only thing they could come up with."

The effects of government shutdowns more than a decade ago were minimal on the market. During the first five-day work stoppage, from Nov. 14 to 19, 1995, stocks rose slightly. The second, more prolonged shutdown from Dec. 16, 1995, through Jan. 6, 1996, resulted in miniscule gains for the three major market indices, a far cry from the investor calamity many pundits had expected.

Among the best-performing stocks during the first furlough of federal employees in 1995, Gilead Sciences (GILD) and Chesapeake Energy (CHK) rose more than 14%. Other energy companies like Southwestern Energy (SWN) and Baker Hughes (BHI) were also big winners. Tech firms like Microsoft (MSFT), JDS Uniphase (JDSU) and KLA-Tencor (KLAC) were the biggest decliners.

During the more prolonged government shutdown that lasted into early 1996, both Chesapeake and Gilead outperformed, along with Biogen Idec (BIIB) and Celgene (CELG). Tech stocks were once again weak, with Adobe Systems (ADBE) and Symantec (SYMC) each down more than 30%.

Singer, though, doesn't expect U.S. citizens to fret as much over a government shutdown as they did nearly two decades ago.

"The public expectation in 1995 was that the market was going to go crazy," Singer says. "Now, the idea that Congress is so dysfunctional that they can't cut their budget by more than 1% or 2%, when you contrast that to the re-pricing of the entire housing stock for the U.S., it's a complete disconnect."

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