Why Markets Rarely Flinch at Government Shutdowns
As readers are well aware, the U.S. government officially shut down after lawmakers failed to reach a funding deal. To date, paychecks for hundreds of thousands of federal employees have been paused, and some national parks and agencies have been shuttered, including the Bureau of Labor Statistics, which supplies jobs and inflation data.
Government shutdowns almost always get constant media attention, perhaps understandably so. They are disruptive and create plenty of short-term uncertainty.1
But for investors, they need not be a source of stress or urgent concern. History tells us, quite clearly, that shutdowns have not been a source of meaningful and certainly not lasting economic impact.
Since 1976, there have been more than 20 shutdowns of varying lengths. None has caused a recession. None has triggered a bear market. And in many cases, stocks moved higher during the shutdown and in the months immediately after. The longest shutdown on record, 35 days spanning late 2018 into early 2019, coincided with a strong equity rally (see chart below).
S&P 500 from January 1, 2018 – March 31, 2019
If we parse out the data even more, going back to all shutdowns since 1976, we find that the S&P 500 was up an average of 12.1% in the year following a shutdown. In the second longest shutdown (21 days in late 1995 and early 1996), stocks went up 3.1% in the month after the shutdown, and +21.3% in the following year.
This is not to say shutdowns come without consequences and should be completely ignored. Hundreds of thousands of federal employees are furloughed without pay, while others, such as members of the military and air traffic controllers, continue working but receive their paychecks later. Businesses that depend on government contracts can see delays, and data collection also halts—which means key economic reports, including the monthly jobs and inflation data, are delayed. In an environment where the Federal Reserve is highly data-dependent, that could momentarily complicate monetary policy decisions.
Still, the broader economic footprint of a shutdown is surprisingly small. Most of the federal budget keeps flowing even when Washington hits a stalemate. Social Security, Medicare, and interest payments on U.S. debt continue, covering roughly three-quarters of total federal outlays. Mandatory programs don’t shut down. And when the government reopens, furloughed workers are paid retroactively, meaning much of the lost income and spending returns to the economy in short order.
For investors, that’s an important distinction. Shutdowns are inherently temporary, and markets know it. A federal funding impasse has yet to alter corporate earnings trends, long-term inflation trajectories, or consumer behavior in any meaningful way. In fact, markets often rise during shutdowns precisely because investors have seen this story before and know how it ends. The government eventually reopens, paychecks resume, and the economic data catch up.
Some commentators have worried about the potential for a shutdown to weigh on consumer confidence or market sentiment. That’s possible in the short term, especially if the headlines grow louder and political rhetoric intensifies. But even in those cases, the effect tends to fade quickly. The same pattern has repeated across decades, with temporary volatility followed by quick stabilization as markets refocus on fundamentals.
Bottom Line for Investors
The question for investors, then, is: are the economic fundamentals still strong enough for markets to look through the shutdown?
In my view, the answer is yes. Growth has moderated from last year’s pace, but the economy continues to expand. The jobs market is showing signs of leveling off, but unemployment remains low. Business investment remains solid, thanks in large part to AI investment, and corporate profits are holding up well. Our colleagues at Zacks Investment Research have been noting for some time now that forward estimates continue to trend higher, signaling confidence in corporate America. The U.S. financial system also remains in fine shape, with healthy lending activity in a monetary easing cycle.
In this kind of environment, it takes more than a political impasse to derail the broader trend.
Disclosure
2 Fred Economic Data. October 6, 2025. https://fred.stlouisfed.org/series/SP500#
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