:max_bytes(150000):strip_icc()/GettyImages-2238140081-fdc1e41d4d5448fe91b77b405f93eddc.jpg "Government Shutdowns Usually Don’t Bother Stocks. Could This Time Be Different?")
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Key Takeaways
- The government shut down on Wednesday after Congressional Democrats and Republicans failed to agree on a funding package.
- Historically, government shutdowns have had little impact on the stock market, with the S&P 500 actually rising during every shutdown since 1990.
- This shutdown could be unusually hazardous, with the White House threatening mass firings and vital economic data being delayed.
The federal government just shut down for the first time in six years, and the stock market—characteristically—took it in stride. But could that change?
The benchmark S&P 500 was up 0.3% on Wednesday afternoon. (Follow Investopedia‘s live markets coverage here.) The muted response was no surprise to market watchers: Government shutdowns may be dramatic, but they haven’t been a major headwinds for the stock market—particularly recently, with the last time the S&P 500 declined during one coming in 1990.
Over the past 50 years, the average S&P 500 return during a government shutdown has been a decline of 1.6%, according to Adam Turnquist, chief technical strategist for LPL Financial. The worst shutdown for stocks was in 1979, when the S&P 500 lost more than 6%.
Why This Matters To You
The government shutdown, which will reduce spending and delay economic reports, could thicken the fog hanging over markets and sap Wall Street of some of the risk appetite that’s been driving stocks higher—though history says stocks don’t pay too much attention to shutdowns.
The most recent shutdown, which lasted from Dec. 22, 2018, to Jan. 25, 2019, was the longest in history. The S&P 500 rose more than 10% in that period as investors looked past the noise of the shutdown and focused on the Federal Reserve’s pivot to more dovish policy after raising interest rates four times in 2018.
“Investors have generally looked past budget-related disruptions, prioritizing corporate earnings, broader economic trends, and other key macroeconomic factors,” Turnquist said.
They may not worry much about this shutdown, either. The AI boom, resilient corporate earnings, and anticipation of interest-rate cuts have lifted stocks to record highs in recent months, and a shutdown isn’t expected to change much for corporate America.
Recent data center deals have reassured investors that AI demand remains strong, and Wall Street analysts are generally optimistic about the upcoming third-quarter earnings season. Individual investors remain cautiously optimistic about the outlook for stocks.
Is This Shutdown Different?
One reason government shutdowns usually don’t hit the stock market is that they tend to be brief. Most last just days, leaving little time for reduced government spending and furloughs to reverberate through the economy. This one could be different.
President Donald Trump’s last shutdown was the longest in history. Democrats have conditioned support for a funding package on Republicans extending health insurance subsidies expiring at the end of the year and reversing Medicaid cuts enacted by the summer’s “One Big, Beautiful Bill.” As of Wednesday, the two parties appeared far apart.
The White House has threatened mass layoffs, possibly leveraging the shutdown to further pursue its goal of shrinking the federal bureaucracy. If federal workers are fired during the shutdown, they won’t receive the back pay they would otherwise get when returning to work, and they may struggle to find new work in an increasingly precarious jobs market.
Economists at Nomura estimate the shutdown could shave 0.1 to 0.2 percentage points off economic growth for every week it lasts.
Shutdown Could Create Rate-Cut Uncertainty
The shutdown also halts the release of economic data, meaning the Federal Reserve could be flying partially blind when it meets at the end of this month.
In September, policymakers credited the weakening labor market for their decision to cut interest rates for the first time this year and forecast two more cuts in 2025. The Bureau of Labor Statistics is scheduled to publish the September jobs report, a vital data point, on Friday, but that likely wouldn’t happen during a shutdown; September inflation reports could be similarly at risk if the government remains closed through mid-October.
Policymakers can try to gauge the health of the labor market and the trajectory of inflation with private reports. But if the shutdown lasts until Oct. 28, they’ll enter October’s meeting with a fraction of the data normally at hand.
Most policymakers were already urging a cautious approach to rate cuts before the shutdown, and limited visibility could make them more wary; options markets indicate a broad expectation of another quarter-percentage-point rate cut. Stocks may be in for a reset if the Fed skips a rate cut investors have already priced in.
