What Would Happen If The Market Shut Down?

It’s easy to take the stock market for granted. Every business day, the opening bell rings on the New York Stock Exchange at 9:30 am, and the ritual is repeated at 4 pm each afternoon when trading closes. Market movements are a staple of news programs and reports, and the closing value of various indexes offers daily insight into the health of the economy as a whole.

The market is so reliable that many forget the stock market can – and has – shut down. Sometimes, it reopens within a few minutes, but there have been periods when the stock market shut down for longer. Some of the most notable market closures include:

• April 15, 1865 – The New York Stock Exchange closed for a week following the assassination of President Abraham Lincoln.

• September 20, 1873 – The market closed for ten days following the failure of Jay Cooke & Company – a banking firm headquartered in Philadelphia.

• July 31, 1914 – Trading on the New York Stock Exchange was suspended for four months when Germany declared war on Russia, launching World War I.

• June 12, 1968 – A $4 billion backlog of unprocessed transactions closed the market every Wednesday through December 31, 1968, so the NYSE could catch up on paperwork.

• September 11, 2001 – The NYSE and Nasdaq did not open following the attacks on the World Trade Center. Both exchanges remained closed until September 17th.

The decision to close the markets on these occasions had a very specific objective: to prevent widespread selloffs based on world events and other factors. Some of these events were particularly momentous, causing lengthy market shutdowns. However, there have been many brief shutdowns that were triggered by sudden, precipitous market drops.

What Triggers a Market Shut Down?

Trading halts, delays, and suspensions for individual stocks are fairly common. Halts occur after the market opens when a brief pause in the trading of a specific stock is necessary while the company releases significant news. Delays are similar, in that trading of the stock doesn’t begin when the exchange opens. Instead, there is a delayed opening for the individual stock so investors can review major announcements made after the previous day’s close.

Suspensions are a bit more serious. These are initiated by the Securities and Exchange Commission (SEC) if that agency perceives an unusual risk for investors. For example, a company’s failure to file required reports or activity suggesting manipulation of a specific stock’s price can result in suspension of trading.

These events have little impact on average traders. The halts and delays are typically brief, and suspensions only impact the targeted stock. Shutting down the entire stock market is much more disruptive, and there are very few circumstances in which such drastic measures are appropriate.

For example, on one occasion, technical issues caused issues with trading. This occurred on July 8, 2015, and the markets were closed for several hours. However, that’s a rare situation. It is slightly more common for the market’s “circuit breakers” to cause a trading shutdown.

What Are Stock Market Circuit Breakers?

Technical issues aside, the primary reason for a stock market shutdown is to prevent excessive volatility that threatens market liquidity. Parameters known as “circuit breakers” have been established to halt trading when large, unexpected drops occur. The goal is to give investors a moment to reflect before selling assets out of fear – and hopefully restore stability to the market.

There are three levels of circuit breakers, and they are based on movement in the S&P 500 Index as it compares to the previous day’s closing price.

• Level 1 – 7 percent drop

• Level 2 – 13 percent drop

• Level 3 – 20 percent drop

Keeping in mind that trading closes at 4:30 pm, Level 1 and Level 2 circuit breakers prompt a 15-minute pause in trading market-wide if the drop occurs before 3:25 pm. If the drop occurs at or after 3:25 pm, trading is not paused. If a Level 3 circuit breaker is triggered, trading is halted for the rest of the day, regardless of what time of day the trigger occurs.

It’s worth noting that these circuit breakers aren’t triggered very often. The system was adopted in 1988, and the first use didn’t occur until October 27, 1997. That’s what made the 2020 market crash so alarming. After many years of disuse, the circuit breakers were triggered four times in ten days as the world responded to the COVID-19 pandemic.

What Happens If The US Stock Market Shuts Down?

Temporary pauses in trading – even those that last several days – aren’t especially difficult to navigate. When no one is trading, stock prices remain more or less the same, and trades can be put off until the market reopens. However, a long-term market shutdown isn’t without precedent, and few investors are prepared for such an event.

There are two critical issues to consider in creating a strategy for surviving a market shutdown. First – are the funds tied up in the stock portfolio critical for managing daily expenses? Some investors have short investment horizons, or their emergency cash reserves are low. Preparation for a market shutdown includes understanding whether inability to sell stocks will create a financial hardship.

The best way to avoid becoming short on cash in the unlikely situation of a market shutdown is to keep an emergency savings account that covers three-to-six months of living expenses. Barring that, though selling stocks is difficult when the market is closed, it’s not impossible. Under certain circumstances, investors can leverage broker/dealer networks rather than using a centralized exchange.

The second issue to consider in shutdown-proofing a portfolio is whether the stock is one that can be held long-term. Remember, even if the stock market shuts down, the underlying companies continue to do business. Ideally, they won’t have lost much of their value when the market reopens.

Billionaire Warren Buffett’s investment strategy wasn’t necessarily intentionally designed to withstand a market shutdown, but by their nature, Buffett’s guiding principles ensure that his portfolio won’t suffer if a shutdown occurs. Buffett buys quality companies at a fair price, and he carefully examines their fundamentals to be sure they are poised for long-term growth.

One famous Warren Buffett quote is, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

In another conversation, he said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

On top of that, Warren Buffett’s holding company, Berkshire Hathaway, does more than invest its billions. Berkshire Hathaway has dozens of subsidiaries that can continue doing business and bringing in profits whether investment opportunities are available or not. For example, Berkshire Hathaway owns a railroad that would continue shipping goods during a market shutdown. Dairy Queen would continue serving Blizzards, and GEICO would continue writing insurance policies.

In other words, sound investing practices can protect portfolios even if the market shuts down. Stocks in high-quality, asset-rich companies are less likely to lose value over time, and they may even be worth much more when the market reopens.

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