Broker Check

The Market Reaction to Government Shutdowns

September 26, 2023

The conversation around government shutdowns feels like a conversation we have pretty much every year. Each time a government shutdown is potentially happening and each time it does it is always something that creates a lot of headlines and in turn sparks fear. But it has obviously happened before. And will it happen again? Probably, yes. Who knows if it will be this year or not, but history tells us at some point we will experience it again. 

Since 1970, the government has shut down 22 times. Each time there are different reasons as to why we reach a shutdown but the overall reason is the same: Those in Washington just can’t agree on how to spend the money and how much to spend. 

So what does this mean for the market and economy in these times? If you were to read only headlines, you would think the worst. However, the data actually says otherwise. 

We will just look at the last 5 government shutdowns that we had and we will use the S&P 500 for the stock market performance index. 

  • December 22, 2018 – January 25, 2019

Duration: 35 days

S&P 500 Change: Approximately +10.26%

  • January 20 – January 22, 2018

Duration: 3 days

S&P 500 Change: Approximately +1.53%

  • February 9, 2018

Duration: 9 hours

S&P 500 Change: Approximately +0.01%

  • October 1 – October 16, 2013

Duration: 16 days

S&P 500 Change: Approximately +2.37%

  • December 16, 1995 – January 6, 1996

Duration: 21 days

S&P 500 Change: Approximately +0.1%

Looking at this data we see that the duration varies drastically. With the longest shutdown being 35 days and the shortest being 9 hours, there isn’t much we can take from how long a shutdown typically lasts. 

However, we actually see that in the last five shutdows, the S&P was positive. The longest shutdown we had, in 2018-2019, had the best performance. Now, that year was definitely an outlier because we can see with the other shutdowns that the best performance was 2.37%. But still, the S&P has been positive the last five times we have had a shutdown. This is something I would think a lot of people would bet the opposite, but data says otherwise.

The one thing to keep in mind is each one of these government shutdowns had different outside factors that also impacted the market. Whether that is interest rates, US political tension, or geopolitical tension there are other factors each time that have their own impact on the market. But what we can take from this is that a government shutdown does not indicate the market is going to sell off. In fact, depending on other factors there may be some optimism in the market even though we are in the middle of a shutdown.

While there will most likely be some volatility with both positive days and negative days, a shutdown is historically something that is a short term hurdle that doesn’t impact us in the long run. So let the noise be noise and let the headlines be whatever they want them to be, because at the end of the day it is just another event we will get through.