Government Shutdown: Stocks Don’t Sweat the Squabbling

So here we are, with a new month and a new government shutdown in progress. We shan’t bore you with the backstory and politics, which you can find discussed to death across the rest of the Internet. Nor will we hazard a guess as to when and how this shutdown will end. It may already have as you read this. We are simply here with a friendly reminder: No shutdown in history ever caused a bear market or recession.

Shutdowns are always big news. But their economic footprint is small. They amount to the temporary shuttering of non-essential (in legal terms, not human) government workers and operations. National Parks and Monuments close. The Smithsonian. Select federal agencies run skeleton crews or close. This pinches all the sandwich shops, cafes and other small businesses that depend on civil servants’ foot traffic, as well as campsites and diners that service your favorite federally run hiking spots.

Perhaps more relevant from a market and personal finance standpoint, government-produced economic data don’t come out, since the statisticians are furloughed, with acting Bureau of Labor Statistics head William J. Wiatrowski the only one still reporting to work.^[i] (Data for Friday’s jobs report have, naturally, already been collected. But the release is paused.) Social Security and Medicare beneficiaries still get paid, but you might have a harder time getting someone on the phone if you have questions.

But all of this is temporary. 2019’s shutdown-ending bill ensured all affected federal workers receive backpay once the government reopens. Vendors and contractors get paid. Those delayed economic reports eventually come out, while private sector-produced alternatives tide us all over in the meantime.

None of this is to say shutdowns have zero economic impact, but the effect is minimal. The most widely cited estimates pencil in -0.1% of GDP per week, with most of that made up once things reopen and federal money is moving again.^[ii] While some lost activity is unrecoverable, as those affected small businesses will attest, in the grand scheme of things, it is small. The CBO reported to Congress that December 2018 – January 2019’s five-week shutdown, history’s longest, is estimated to have lopped off a whopping -0.02% of 2019 GDP.^[iii]

Or, consider it this way: While government spending and investment contributes to GDP, most of that is state and local activity. Uncle Sam amounted to just 6.5% of GDP in 2024.^[iv] The private sector—businesses and everyday people—generates the vast majority of economic activity. The headline focus is disproportionate to the actual economic significance.

As for stocks, we will let the numbers speak for themselves. Exhibit 1 shows returns before and after all shutdowns in history, including that weird one in 2018 that lasted only a Sunday. As you will see, sometimes there are some wobbles in the run-up, but returns during and after are positive the vast majority of the time. Shutdowns are a false fear that stocks have long since learned how to live with.

Exhibit 1: Government Shutdowns Don’t Wreck Stocks

Source: FactSet, as of 9/23/2021. S&P 500 price returns, 9/30/1975 – 1/25/2020.

We doubt it is different this time. Economic drivers all look fine, as we detailed here. And, a few hours in, this time isn’t looking any different: US stocks rose 0.3% on the day.^[v] There is some handwringing about the Fed potentially lacking access to key data when it meets late this month, but that is overwrought. Even in a prolonged shutdown, they will have plenty of private sector-produced reports to parse, as well as the scuttlebutt from all the dentists, shopkeepers, country club reps and other business contacts in their districts. We are avid readers of Fed transcripts, and all that scuttlebutt takes up far more of their meeting time than your average government-produced data report. Seems to us they know the reports tell us all what already happened, while their contacts can help them estimate what will happen. And policy is best geared toward the future, not the past.

Last week, we observed that sentiment toward this shutdown seems less panicky than in the past. That still holds, based on our read of all the coverage Wednesday morning. But maybe a longer shutdown will rattle nerves more. We shall see. In the meantime, markets will keep going about their business of pricing in expected developments over the next 3 – 30 months. Whatever happens in the short term will have a fleeting impact, at most.