Is Sentiment Shifting on Shutdowns?

Barring a last-minute deal, we are T-minus five days from a partial US government shutdown, and something weird is in the air: a relative dearth of stock market fear. Sure, we still see the requisite pieces arguing it will be hard on furloughed workers and the small businesses relying on civil servants’ foot traffic. The White House’s jawboning about mass federal layoffs adds to concerns about individual households. Economic beat writers are trotting out the classic estimates that shutdowns shave a tenth of a percentage point off annualized GDP growth per week. But precious few pieces warn of stock market doom. Perhaps, as the deadline draws closer, fear will escalate. But for now its scarcity is a welcome and sensible relief, giving investors one less reason to consider veering from their long-term financial plan.

Because memories are short and the news cycle is so fast-moving, it may be difficult to put today’s shutdown coverage in context and weigh how the tone has changed. So here is a trip down memory lane to give you a taste of what people said as prior 21^st century shutdown standoffs loomed. Our goal isn’t to name and shame outlets for being bearish, but to show you the fear was real and appeared prominently in coverage.

In September 2013, investors dealt with the twin threats of a government shutdown and debt ceiling breach. The latter meant “default” fears spent a lot of time in headlines, but there was also plenty of shutdown-specific fear. On the shutdown’s eve, The Guardian noted heightened volatility and featured analysts warning a long shutdown would take markets down further. One stated: “‘This is a contrived crisis that is going to have real consequences. … It will cause unnecessary volatility in the market and ultimately cost the economy.’” That analyst wasn’t a lone voice in the wilderness: “‘That politics is no longer simply a noisy sideshow but rather a real risk with real consequences could well have some effect on market and economic confidence. This effect will be greater if Congress can't find a way out of shutdown for an extended period.’”^[i] One week into the shutdown, headlines continued tying volatility to it, including global volatility. The Associated Press’s coverage is a prime example: “Budget Showdown Weighs on Stock Markets.”^[ii]

A little over four years later, under a different administration, shutdown chatter again whacked sentiment. For instance, a January 2018 MarketWatch piece discussing stocks’ historical reactions to shutdowns emphasized that past shutdowns had a mixed impact and average declines were small, but it then argued this time risked being different. It warned, “the particular circumstances of the current government, as well as today’s investing environment, could mean the market is more vulnerable than normal.”^[iii] By that year’s end, as stocks were facing their third shutdown standoff of the year, The Wall Street Journal was warning a long shutdown could make extant market volatility even worse. At the time, markets were reeling as hedge funds’ forced selling hit stocks hard and indiscriminately. The Journal argued a shutdown would pile on: “The danger, analysts said, lies in the prospect of a prolonged stalemate, coming at a time when investors and businesses are already jittery over multiple factors, including U.S.-China trade tensions, rising U.S. interest rates, the decline in stock prices and slowing global economic growth.”^[iv]

Lastly, consider the tone in 2023, when the government averted a shutdown at the last minute. In the run-up, fear ran rampant. A late-September Yahoo! Finance analysis emphasized some cherry-picked data purporting to show stocks plunge ahead of long shutdowns. “Markets tend to hate US government shutdowns and the uncertainty they cast on the economy and big companies. And they really hate the long, drawn-out variety. New number crunching out of RBC Capital Markets … found that in the lead-up to the last seven government shutdowns (of 10 days or more) dating back to 1976, the median S&P 500 decline was 10.2%.”^[v] Days later, The New York Times blamed volatility on the standoff and warned of further fallout in bond and stock markets. “The markets had been wobbling well before the latest turmoil in the House. But the move on Tuesday to oust Kevin McCarthy, Republican of California, as speaker, raised the prospect of a prolonged leadership vacuum. That could doom negotiations to fund the government beyond Nov. 17, when a temporary deal agreed last week will expire, adding to investor anxieties.”^[vi]

This time around, thus far at least, we aren’t seeing this kind of thing. This week, Kiplinger asked, “What Does a Government Shutdown Mean for Stocks?” And its answer was generally cheery: “Federal government shutdowns aren’t bad for stocks, at least historically speaking. Although the market hates the threat of a federal government shutdown – an outcome that looks increasingly possible should Congress not agree to a funding bill before the end of the month – the S&P 500's performance during past shutdowns has been pretty good.”^[vii] A Bloomberg piece concurrently noted, “Financial markets tend to shrug off threats of a shutdown as just more heated Washington rhetoric given the history of standoffs being resolved at the last minute. Both sides are more dug in this time so a shutdown is both more likely and more difficult to end. US equity markets, large-cap companies and major US government contractors are unlikely to be affected much in a short shutdown, even if it continues for a few weeks, according to a Bloomberg Intelligence analysis.”^[viii]

The landscape isn’t entirely fear free. A Wednesday New York Times article provided a good snapshot of the fears we have seen, centering on the hardship for government workers, especially those on the lower end of the pay scale who have a harder time making ends meet. Notably, it didn’t hype recession risk, and it didn’t mention the stock market.^[ix] Coverage elsewhere has also noted 2019’s shutdown-ending legislation makes backpay automatic for employees furloughed or forced to work without pay during a shutdown, negating the need for Congress to approve backpay each time—and easing a long-running fear.

We did find one Reuters piece exploring purported market risks, but those risks included the yield curve steepening—a positive, last we checked. It did say, “Historically, markets have tended to shrug off shutdowns. However, this time could be different.”^[x] But the discussion that followed omitted stock market returns, focusing instead on market plumbing, trade execution and initial public offering issuance. Logistics, not volatility.

Again, maybe this will all change. Five days is a long time for emotions to heat up and sentiment to darken.

But we won’t totally be surprised if panic doesn’t ensue. For one, many investors likely remember the lengthy 2019 government shutdown, the 2023 drama and others. But also, the politics have shifted some. Both the Trump administration and the Democrats seem to think they have things to gain from a shutdown ahead of 2026’s midterms, and in the partisan environment existing today, we could see many investors nodding along.

The upshot of all this is twofold. One, it is a welcome respite. An oasis of sensibility. Government shutdowns aren’t bearish. None in history has caused a recession or bear market. But when fear spikes, volatility can escalate, especially in the run up to a shutdown. Sharp wobbles don’t hurt long-term returns, but they can jeopardize investors’ ability to reap those returns. Fear and volatility can trigger the fight-or-flight instinct that makes people sell at the wrong time. To the extent investors might not have to deal with that this time around, we think that is a feature, not a bug.

But also, historically speaking, government shutdowns have been little more than a false fear—and false fears are bullish, lowering expectations and teeing up positive surprise when the sky doesn’t fall. Markets are dynamic and adaptive. It is possible that an event’s or factor’s power could fade over time. Perhaps—and only time will tell—that is happening with bullish shutdown worry.