When the federal government shuts down, the image that comes to mind is usually one of shuttered agencies, furloughed workers and political gridlock. Less obvious, but just as important, is what happens in the stock market during these episodes of fiscal drama. Do investors panic, or do they look past the noise? The story of the last major shutdown in 2018–2019 (and those that came before) offers some surprising lessons about how stocks perform when Washington stalls.
Ryan Detrick of Carson Group (a name that’s frequently cited by Cabot analysts) shared the following graphic showing the performance of the S&P 500 during and after government shutdowns with his readers:
The most recent and longest government shutdown in modern U.S. history began just before Christmas in 2018. On December 22, funding lapsed after political disagreement over the federal budget, leading to a partial shutdown that dragged on for a little over a month. At the time, analysts warned that the disruption could shake investor confidence. Government contractors braced for delayed payments, many agencies halted or slowed services and a wave of federal workers were forced into furlough.
But, despite the uncertainty, the market surged higher.
During that five-week stretch, the S&P 500 gained more than 10% as it snapped back from what was a rough Q4 of 2018.
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For many investors, the rally reflected a conviction that corporate earnings and economic fundamentals mattered far more than a temporary pause in federal operations. It was also a reminder that Wall Street often anticipates these events. Shutdowns are rarely a surprise; they build up over weeks of tense budget negotiations. By the time the government closes its doors, much of the uncertainty is already priced into equities.
The 2018–2019 episode was not unique. Five years earlier, in October 2013, the government shut down for 16 days. That closure, driven by disputes over healthcare funding and spending caps, was shorter but still disruptive. Over the period, the S&P 500 rose more than 3 percent. Investors, once again, appeared willing to look beyond short-term political fights and focus on the broader trajectory of the economy.
In fact, the historical record suggests that shutdowns, while unsettling, rarely derail financial markets. Looking back across several decades of shutdowns, the S&P 500 has posted gains in more than half of them, as you can see in the table above. On average, the index has edged up slightly during the periods when the government is closed.
Looking out even further, on average, the S&P 500 is higher by 12.7% one year after the shutdown has passed. The implication is clear: Markets have tended to treat shutdowns as temporary interruptions, not existential threats.
That does not mean shutdowns are irrelevant. They do create pockets of volatility and heightened day-to-day swings, particularly in sectors most exposed to federal spending. Defense contractors, aerospace companies, infrastructure builders, and technology firms with large government contracts often feel the pressure most acutely.
Delayed payments can weigh on earnings forecasts, and uncertainty around future appropriations may dampen investor perception. By contrast, defensive sectors such as utilities, healthcare, and consumer staples usually see less impact, since their revenues depend more on household demand than government outlays.
Another complication is data. During a shutdown, key federal agencies pause the release of major economic reports, from employment figures to GDP updates. It’s widely expected that the current shutdown could result in Friday’s monthly Bureau of Labor Statistics jobs report being delayed or simply not released at all.
It is, of course, one incremental data point, and we’ve already received ADP payroll revisions and data this week, so it’s not as if investors are flying entirely blind.
That said, all else being equal, investors would prefer more data, not less.
Still, once the political standoff ends, markets tend to rebound quickly. Federal workers receive back pay, contractors resume billing, agencies restart operations and the flow of economic data returns.
While the interruptions may bruise confidence in the short term, the damage is rarely lasting.
Why do markets show such durability in the face of dysfunction? Several reasons stand out.
4 Reasons Not to Sweat the Government Shutdown
First, shutdowns generally aren’t a surprise to the market. In other words, it’s priced in.
Second, while disruptive, their economic drag is usually modest unless they stretch on for months, which is very rare.
Third, monetary policy often provides a counterweight. In 2018, for example, investors were focused much more on Federal Reserve policy as on Washington politics, and the Fed’s gradual shift away from rate hikes helped stabilize sentiment. And that’s certainly the case this time around as well, as investors are laser-focused on Fed cuts.
Lastly, investors are focused on earnings and the ongoing growth of artificial intelligence (AI). As long as profits are growing and recession risks appear contained, investors are willing to look past the noise in Washington.
Of course, an unusually prolonged shutdown could sap business and consumer confidence enough to dent growth. And without data to base their decision-making on, the Fed may be reticent to continue cutting rates, given the persistently high inflation. But Jerome Powell and company have made it abundantly clear that they are more concerned with the strength of the labor market than the risk of elevated inflation, which raises the odds that they’ll err on the side of cuts even without data confirming ongoing labor weakness.
Will this shutdown play out like those before it? We won’t know until it’s over, unfortunately. And it’s worth remembering that the current administration has already injected a never-before-seen dose of chaos into the U.S. economy, including plans for potential large-scale firings or layoffs (on top of the normal shutdown furloughs).
Even so, the best course of action for most investors is simply to avoid overreacting.
Government shutdowns make headlines, but they barely register as more than speedbumps for stocks. So your best bet is just to tune out the noise.
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