Oct 2, 2023

Government Shutdowns and Stock Market Performance

Weekly Market Commentary

Government shutdowns make for good political drama. Nonessential workers are furloughed, travel plans to national parks could be interrupted, and some services are limited. A shutdown also increases investor anxiety.

But should sentiment take a beating? Historically, the short answer has been no.

According to CNN Business, shutdowns have lasted roughly a week on average. The most recent one stretched over 34 days.

While there is a disruption in some government services, the longer-term impact on the economy is almost zero.

When the shutdown ends, government workers receive backpay, and government-contract work resumes.

If a shutdown has virtually no impact on the economy, it stands to reason that it would probably have little medium- and longer-term impact on stocks. As the graphic above highlights, the short-term effect has historically been minimal.

That’s not to say that we might not see some short-term volatility, as we saw last week. Some of that was likely tied to short-term traders taking a more cautious approach.

Any extended shutdown would also lead to a delay in some economic reports amid worker furloughs.

In addition, a shutdown might reduce the odds of a November rate increase as the view of the economy is muddied.

However this eventually plays out (an agreement could limit, delay, or prevent a shutdown), the historical data suggest that investors with a long-term view should not let short-term uncertainties affect their investment strategy.

The deadline to avoid a shutdown is October 1.

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