Government Shutdown: Investor Implications

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Oct. 1 marked the first day of the federal government shutdown after Congress did not agree to fund the government. The primary obstacle, as ever, was the perennial debate over Obamacare subsidies, a matter of such profound importance that it has rendered Congress incapable of functioning.

Thousands of federal workers across agencies were furloughed at midnight, and President Trump has said that the shutdown could mean permanent layoffs for some federal government workers. A spectacle of bureaucratic impotence, it seems, has been reduced to a game of musical chairs with public servants.

Over half a million employees were furloughed, the majority being the Defense Department’s civilian workforce. Many of those who are not furloughed will work without pay until the shutdown is over, a situation that evokes the melancholy of a well-managed estate during a prolonged absence of its master.

Services will also be impacted. For instance, investors are no longer expected to get the monthly unemployment report from the Bureau of Labor Statistics on Friday. Government properties like national parks will also have some restrictions, as if the state had suddenly developed a conscience.

For investors, there are both near-term and long-term impacts of the shutdown. Layoffs would exacerbate an already tenuous labor market, and even extended furloughs could dampen consumer spending, especially in the Washington, D.C., area. A city built on the illusion of perpetual motion now finds itself in a state of arrested development.

What the shutdown means for the stock market

Historically, government shutdowns have proven as effective in influencing the stock market as a dachshund in a hurricane-negligible, yet occasionally amusing. Investors tend to look past them, viewing them as short-term noise, rather than a long-term economic driver.

Over the 20 government shutdowns since 1976, the S&P 500 (^GSPC) has averaged a gain of just 0.05%, meaning shutdown events aren’t statistically significant. Typically, other news influences the market’s performance when shutdowns happen, as if the market itself were a fickle lover.

For example, during the last shutdown, which was a 34-day partial shutdown that began in December 2018, stocks rebounded after falling earlier in the quarter as a positive development happened in U.S.-China relations and as interest rates came down. A reminder that markets thrive on the whims of geopolitics and central banks.

Stocks have actually risen in the last five shutdowns, though durations vary. Overall, the results seemed to reflect what was happening in the broader market, as if the government’s dysfunction were merely a minor subplot in the grander narrative of economic cycles.

The risks in the current shutdown

The economy has been volatile all year. First-quarter GDP was down, and the stock market crashed in April before returning to all-time highs. Consumer sentiment also plunged early in the year before stabilizing, and now the labor market is clearly weakening. A performance worthy of a tragic opera, if only the audience were paying attention.

An extended shutdown could further dent the labor market, especially if it encourages more layoffs at the federal level. The irony, of course, is that the very institution meant to stabilize the economy now threatens to destabilize it further.

On the first day of the shutdown, the S&P 500 finished up 0.3%, showing it hasn’t flustered investors. While there’s no historic correlation between government shutdowns and stock market performance, that doesn’t mean investors should totally ignore it, as its impact could extend well beyond the government closure, especially if it throws the labor market further off course. A cautionary tale in the art of fiscal negligence.

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2025-10-02 01:21