How Does a Government Shutdown Affect the Stock Market? Impact and Analysis

Another day, another crisis of leadership in our government. Fears of a looming government shutdown might have you wondering if it’s time to “shut down” your stock investments until this is all fully resolved. Currently, the government is only funded until November 17, 2023, igniting discussions about the financial implications of a shutdown.

While the latest budgetary showdown might give you nightmare flashbacks to the Debt Ceiling crisis from earlier this year, there are some important distinctions between the two. While the Debt Ceiling was ostensibly about raising the government’s ability to borrow and pay their obligations, the real risk was whether the U.S. Government would default on their debt (The U.S. Government has never defaulted, and doing so would have major implications, not just for the U.S. but for the global economy).

Conversely, the current government shutdown debate is about funding discretionary spending for the coming budgetary year. While it’s labeled a “shutdown,” it’s not as catastrophic as that term might indicate. Failing to reach an agreement would not cause the government to default or shut down, but rather pause the operations of some nonessential agencies, like national parks and museums. Critical agencies will remain open and funded. It might surprise you to learn that there have been 21 shutdowns since 1976, about one every two years, so this isn’t a new issue.

If the government does “shut down,” what does that mean for the stock market and your investment portfolio? Well, if history is any guide, not much. Vanguard recently measured the magnitude of the S&P 500 Index returns during historical shutdowns:

*The government shut down overnight. An agreement was reached before the markets opened.

Sources: Vanguard calculations, based on data from FactSet and the Congressional Research Service.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. 

During the last 21 instances of government shutdowns, the S&P 500 index has had positive returns more than 50% of the time. This is, statistically, almost the exact same odds as any other multi-day period in the market, government shutdown or not. There is no strong correlation between a shutdown and current or future market returns. Markets are influenced by a vast array of inputs, and a temporary shutdown of some government agencies, while certainly not negligible, is just one of them. Predicting short-term market movements using just one factor is a siren’s song that has led many investors to regret and ruin.

In conclusion, while the question of how a government shutdown affects the stock market is valid, historical evidence suggests that it is not a significant factor for market returns.

The best option for your portfolio is to ensure that the success of your goals doesn’t hinge on correctly guessing what is, essentially, a coin toss. If that’s your strategy, I would suggest Blackjack; the odds are about the same and the results will finalize much quicker. For me and my clients, however, I prefer a much more strategic approach, where assets are allocated to investments that are suitable for the time horizon of the goal in a well-diversified portfolio.

There will always be market volatility and fear-inducing headlines, but as we know by now, that’s par for the course.