Shutdown delayed, but investors remain uneasy

11/21/2023 — Last week, Congressional leaders punted once again on funding the federal government, passing a temporary measure that avoids a shutdown and keeps the government running until Congress reconvenes in the new year. The latest agreement set two deadlines in January and February 2024 to pass spending bills for the full fiscal year, which began in October.

Government shutdowns are unambiguously negative for the economy due to delayed services and deferred wages for federal workers. According to the Congressional Budget Office estimates, the partial government shutdown in late 2018 and early 2019, the longest in U.S. history, cost the economy roughly $11 billion. Given that past shutdowns have been short-lived, their economic impacts have been limited, with only minor declines in real GDP growth caused by the disruption to government operations. Federal workers have received lost pay once funding resumed, which eventually evened out the income effects for the economy.

As an investor, all these warnings about the potential risks from government shutdown can weigh on sentiment. The recent positive news on inflation buoyed markets, but concerns remain over the likelihood of an economic slowdown and elevated geopolitical risks. In this pause before the next round of political brinksmanship, it’s an excellent time to consider what a government shutdown could mean for the stock market. The accompanying table shows that past government shutdowns have not significantly impacted the stock returns. From an investor’s standpoint, government shutdowns (or at least the threat of shutdowns) may create anxiety, but they haven’t necessarily sparked a severe downturn in the stock market.

History shows equity markets have been resilient during these periods. For instance, stocks have appreciated in more than half of the previous government shutdowns (when the federal government was closed). And 12 months after these past shutdowns, stocks were higher 90% of the time. But as is the case whenever citing market history, investors should not assume past trends will continue in the future.