Government Shutdown Looms: What it Means, How Rare It Is, and Why Investors Shouldn't Worry

Monday, President Donald Trump will meet with congressional leaders in a last-minute effort to avoid a government shutdown. Should President Trump and the Democrates fail to reach an agreement, the government will shutdown Tuesday at midnight.

What is a Government Shutdown?

A government shutdown transpires when the United States Congress is unable to gather the minimum number of votes needed to pass an appropriation (payments from the US Treasury for a specific purpose) or a temporary continuing resolution to fund the federal government’s spending for the next fiscal year. When a government shutdown occurs, non-essential government employees are put on unpaid leave, essential government workers (like air traffic controllers) must work without pay (until a resolution is passed, where they receive back pay), and government services such as National Parks close.

How Rare are Government Shutdowns?

Government shutdowns are relatively rare. Over the past twenty years, there have been four major government shutdowns. History suggests that extended shutdowns are extremely rare. For instance, half of the government shutdowns over the past twenty years were resolved within three days. In 2018, the government shutdown for 35 days over a US-Mexico border dispute during the first Trump presidency. The government also shutdown for 16 days in 2013 over a congressional fight over Affordable Care Act (ACA) spending.

Does a Government Shutdown Loom?

Based on recent rhetoric from Senate Minority Leader Chuck Schumer and President Donald Trump, a government shutdown appears likely. In a recent NBC News interview, Schumer said, “If the president at this meeting is going to rant and just yell at Democrats and talk about all his alleged grievances and say this, that and the other thing, we won’t get anything done.” Meanwhile, President Trump said that a shutdown is likely because “Democrats are crazed” and added “If it has to shut down, it’ll have to shutdown.”

Bettors on betting website Polymarket seem to agree, with 59% predicting a government shutdown by October 1^st (though the odds have dropped from a peak of 77% of bettors predicting a shutdown last week)

How do Government Shutdowns Impact Markets?

Although government shutdowns can have a dramatic impact on government workers and produce alarming headlines, they generally have little impact on US equities. In fact, Bank of America (BAC) data indicates that the S&P 500 Index has gained ~1% on average during recent government shutdowns.

Why Investors Should Not Worry About a Government Shutdown

S&P 500 Seasonality Flips Bullish Right About Now

Beyond the evidential price data that tells investors not to fear shutdowns, the current market conditions should be taken into account by investors. The stock market has been very bullish recently. How Strong? Stocks just completely ignored late-September seasonality trends, which are historically negative, driven by continued strength in AI stocks like CoreWeave (CRWV) and Oracle (ORCL), nuclear energy stocks like Oklo (OKLO), and quantum computing stocks like Rigetti Computing (RGTI) and IonQ (IONQ). Now with September nearly in the rearview mirror, stocks should benefit as they enter a seasonally strong period.

Market Breadth Remains Robust

Beyond bullish seasonality tailwind, stocks should benefit from interest rate cuts. Additionally, market breadth (participation) remains robust, with the number of S&P 500 stocks above the 20-, 50-, and 200-day moving averages increasing. Historically, deep market pullbacks with these conditions are extremely rare.

Bottom Line

While the political rhetoric makes a government shutdown seem probable, investors need not panic. Historically, these shutdowns have been short-lived and have generally had a minimal, if not positive, impact on stocks.

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This article originally published on Zacks Investment Research (zacks.com).

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