How Markets Weather Government Shutdowns

For the first time since January 2019, the federal government has entered a partial shutdown, a result of a congressional stalemate that failed to produce a funding agreement before the October 1 deadline. This marks the 21st shutdown since 1976, and although the headlines can feel alarming, investors would be well served by reviewing how past shutdowns have actually played out.

What’s Happening Now

Congress failed to pass a continuing resolution to fund government operations, with disputes centered around spending cuts, Medicaid rollbacks, and the permanence of Affordable Care Act subsidies. The result is a partial closure of the federal government, which halts or delays services such as those at national parks, passport processing, and the release of economic data, including the September payroll report, scheduled for Friday.

This means hundreds of thousands of federal employees face furloughs or will work without pay until a resolution is reached. These furloughs create short-term economic pain for families and communities, but do not typically translate into lasting damage to the broader U.S. economy.

What Shutdowns Have Meant in the Past

Government shutdowns are nothing new. Since 1976, there have been 20 prior instances; some have lasted just a day or two, while others have stretched over weeks. Yet the market’s memory is short and resilient.

A few examples:

• • 1995-96 Shutdown (21 days): The S&P 500 rose more than 10% in the six months that followed.
  • 2013 Shutdown (16 days): The market shrugged it off, gaining more than 2% during the shutdown itself.
  • 2018-19 Shutdown (35 days): The longest on record. Even then, the S&P 500 climbed 11% during that period, bolstered by positive earnings and a strong labor market.

Key takeaway: Markets are forward-looking. Investors have consistently looked past shutdown disruptions, especially when the underlying economy remains solid.

What It Means for the Economy

Economically, shutdowns come with a cost, but that cost is usually temporary and recoverable.

• • According to Bespoke Investment Group, GDP tends to drop by 0.1% per week of a shutdown.
  • But that loss is often made up quickly once government spending resumes and furloughed workers are paid retroactively.

The biggest risk now isn’t financial contagion, it’s data disruption. If the shutdown drags on, delayed economic reports could leave the Federal Reserve flying blind at its upcoming meetings in late October and December. The Fed has already signaled a data-dependent path forward. Missing inflation or jobs data may tilt the Fed toward a more cautious stance, even if a rate cut is expected.

How Should Investors React?

Most investors have grown used to shutdown headlines. Markets may experience some near-term volatility or jitters, especially if political rhetoric intensifies or the duration of the situation extends. But that volatility often presents opportunity.

Consider:

• Stocks tend to recover quickly after shutdowns resolve.
• Earnings expectations remain strong for next year.
• Consumers remain resilient, with low unemployment and strong balance sheets.
• Shutdowns don’t change long-term fundamentals – especially for diversified investors.

While valuations are elevated and market breadth has narrowed, short-term pullbacks could be healthy and provide buying opportunities for disciplined investors.

Perspective and Planning Matter Most

Shutdowns create noise but typically not structural damage. For long-term investors, the most prudent move is to stay diversified, remain invested, and avoid knee-jerk reactions. Focus on what you can control.

“History may not repeat itself exactly, but it often rhymes.” – Mark Twain

We’ve seen shutdowns before, and we’ll likely see them again. What matters most is keeping perspective and staying focused on long-term goals. If you’re a client, know that your TRPG Wealth Manager is here to support you. If you’re not yet working with us and would like to discuss how current events align with your financial plan, our team is always available to connect.