What Does a Government Shutdown Mean for Stocks?

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 spending bill before Friday night's deadline – the S&P 500's performance during past shutdowns has been pretty good.

If our latest brush with a government shutdown seems particularly irksome, it may be because investors are desperately trying to sift through the noise sparked by head-spinning tariff headlines and the impact they are having on markets.

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"Tariff uncertainty has captured most of the blame for the selling pressure and is exacerbating economic growth concerns," says Adam Turnquist, chief technical strategist for LPL Financial.

"In only a few weeks, the broader market has gone from record highs to correction territory, marked by a drawdown of at least 10% from a new high," Turnquist adds.

And while drawdowns are normal and healthy for markets, creating oversold conditions and opportunity for nimble investors, the strategist says that the "damage to longer-term breadth, lack of institutional participation, and defensive rotational pressures leave us cautious on buying the dip right now."

Given this backdrop for equities, it's fair to say that dysfunction in D.C. doesn't help.

Stock performance during government shutdowns

Happily, for market participants, the historical record for stocks when the federal government shuts down is far from one of doom and gloom.

There have been 21 government shutdowns since 1976, but on only four occasions were operations affected for more than one business day, writes Jeffrey Buchbinder, chief equity strategist at LPL Financial. That leaves us with only four "true" shutdowns, Buchbinder notes, the last occurring in late 2018 into early 2019.

It's tough to remember now, but the S&P 500 returned 10.3% during the 35-day shutdown of 2018-2019. Have a look at the chart below:

Stocks did fine during the extended shutdown of October 2013 too.

"Historically, markets were not materially impacted by a shutdown," Buchbinder says. "For example, in 2013, the House and Senate were in a standoff over funding for the so-called Affordable Care Act and the government was shut down for 16 days during the first part of October. The S&P 500 had some down days but overall, the equity market took all the political drama in stride with a 3.1% advance during those 16 days."

It's sort of counterintuitive, but during the 21 government shutdowns, the S&P 500 rose 55% of the time, generating an average return of 0.3%, according to data from Carson Group. Even better, 12 months after the end of the shutdown, the S&P 500 was higher 86% of the time, with an average return of 12.7%.

Past performance is no guarantee of future results, but the record for stocks in government shutdowns is almost encouraging. When the last federal government shutdown ended in 2019, the S&P 500 went on to return almost 24% over the next 12 months. There are probably plenty of market participants who would take that deal again.

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