Government Shutdowns

The start of the fourth quarter has been marked, inauspiciously, by a shutdown of the U.S. federal government. The last shutdown occurred in 2018, during President Trump’s first term in office, when disagreements over border-wall funding resulted in federal offices and agencies being closed for 35 days (the longest shutdown on record).

Economic effects of a government shutdown normally depend on length and timing: a one- or two-day lapse that falls over a weekend typically causes little measurable economic disruption, while multi-week shutdowns can produce visible consequences: furloughed federal workers, delayed government services, disrupted contract spending, and reduced GDP growth for the quarter in which they occur.

Since 1980, there have been more than 10 shutdowns, but only six lasted three days or more (see table below). These shutdowns have produced mixed market outcomes:

• During the 1995–1996 budget fight the U.S. market was effectively flat to slightly positive across the combined shutdowns.
• During a 16-day shutdown in 2013, the S&P 500 Index rose modestly.
• During the 35-day 2018–2019 shutdown, the S&P 500 advanced significantly, as markets were driven higher by corporate earnings and other factors despite the political conflict.

As shown above, financial markets tend to show resilience during shutdowns. Investors tend to tolerate political uncertainty and look past brief disruptions. Equities usually react more strongly to macroeconomic data, earnings, and monetary policy than to short-term funding gaps of the federal government. We should hope for the same this time around.

James S. McConnel

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