Why the upcoming government shutdown is potentially a “buy the rumor, sell the news” event

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by mnelso32

So it seems like we are inevitably headed for a government shutdown starting on October 1st so I wanted to see how the market reacted for the previous government shutdowns that occurred in recent history (after 2000). From what I can tell, these are typically “buy the rumor, sell the news” events. For example, here’s how SPY reacted for the 12/22/2018 – 1/25/2019 shutdown (which ultimately costed the government 5 billion dollars):

Clearly you can see that the market dumped starting around 12/3/2018 (buy the rumor, i.e. buy puts) and right when the shutdown officially happens it starts to pump (sell the news). Next, here’s how the SPY reacted for the 10/1/2013 – 10/17/2013 shutdown (which ultimately costed us 2.1 billion dollars):

Again we see that the market dumped starting around 9/20/2013 (buy the rumor, i.e. buy puts) and on the day the shutdown officially happened the market rallied (sell the news). Note that there was also a very small shutdown on 1/20/2018 – 1/22/2018 (which ultimately didn’t cost the government anything) which happened over a weekend. The market didn’t really dump into that (though it did pump on 1/22/2018). My understanding here is that the market (correctly) anticipated that this wouldn’t be a very significant event (and it wasn’t because it was short-lived and didn’t cost the government anything).

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Also note that “buy the rumor, sell the news” here means purchasing short positions (like puts) and selling them. I guess you could also say “sell the rumor, buy the news” but I’ve never seen in phrased like that. In any case, I think a very safe and profitable strategy would be the following: if the market does dump into October 1st and the government officially shuts down, then I would expect there to be a massive rally a day or two afterwards, so maybe it’s a good idea to load up on shares/calls in this case (if the market doesn’t dump into October 1st, then I wouldn’t do this though).

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