BarroMetrics Views: US Government Showdown II
In US Government Shutdown, I said “Commentators are suggesting that there is a belief the ‘polys’ will take the US to the brink but will, at the last moment, avert a shutdown.
This time, I think, it is different.”
Well, the rubber hits the road on Tuesday morning…shutdown now seems all but inevitable. I had a squiz at all the times we have previously seen a shutdown in Washington. The closest analog chart I found was the shutdown from 9-30-76 to 10-11-76. Figure 1 shows the period.
The comparison is not picture perfect:
- In 1976, the shutdown occurred after the 1973 peak.
- If I am correct about US Stocks rhyming with the 1966 to 1982 period, then 2013 is at the 1973 time zone.
Still the political and technical environment of 1976 is very similar to that of today: Like today,
- in 1976 we saw a funding issue. The Democrats controlled both Houses and Ford had vetoed the funding bill for the Depts of Labour, Health, Education and Welfare because the bill failed to adequately restrain spending. (see Here-is-every-previous-government-shutdown-why-they-happened-and-how-they-ended)
- technically we saw the Dow make a new high on Sept 22.
- the week before the shutdown, the Dow had started to break.
- After the shutdown, we saw a relief rally of 9.8% that was followed by
- a 60-week break of 26.8%.
However, as I said on Friday in ‘Shutdown? Default?“, the overall shutdown picture is equivocal. What may be the decisive element this time, is a shutdown followed by a default. The events of themselves may or may not decisively affect the US economy; but their effect psychologically may well turn out to be more important.
If the shutdown and default occur, we are likely to see more QE not less. That news should provide a rally in US Stocks. If that rally is anemic, then I’ll have the technical evidence I need to say that the combined effect of the shutdown and default had been to break the belief in QE – similar to the break in Bonds when I said that the inverse nexus between Bonds and Stocks had broken.
FIGURE 1 Dow Jones 1973 to 1982