Do Government Shutdowns Affect the Stock Market?

A possible shutdown of the U.S. federal government is looming as the government reaches the end of its fiscal year on Sept. 30, 2021, with funding for its operations expiring at the end of that day. A key point of contention is a bipartisan infrastructure bill, debate over which is holding up the passage of legislation funding other government operations for the upcoming fiscal year.

Additionally, in mid-October, the government is projected to reach its spending limit, and unless Congress votes to raise the debt ceiling, this may cause the U.S. government to default on debt payments for the first time ever, as well suspend various other payments, including Social Security checks and monthly child tax credits, among many others. Below is an examination of the effects of previous shutdowns on investors and the markets.

The 2018 Partial Shutdown

The U.S. government partially shut down on Dec. 22, 2018, when Congress could not agree on a funding deal. On Jan. 25, 2019, President Donald Trump and congressional leaders struck a deal to re-open the government for three weeks while they ironed out a broader agreement. The sticking point was Trump's insistence that a funding bill include $5 billion with which to build a southern border wall between the U.S. and Mexico, which congressional Democrats refused to support.

During the shutdown, some 800,000 federal government employees were denied wages for their 34 days of work, although they have since received back pay. Several government offices were closed, including parts of the Internal Revenue Service and the Securities and Exchange Commission. However, the military remained open, thanks to a resolution passed earlier in the year.

How Do Government Shutdowns Affect the Stock Market?

The last government shutdown lasted for 69 hours, beginning on Saturday, Jan. 20, 2018, which was triggered by the failure of Congress to pass a bill funding the government, largely due to disagreements over immigration policy. When the market opened to a still-shuttered government on the morning of Monday, Jan. 22, stocks surprisingly rose 0.8%. Clearly, investors weren't dissuaded by the tumult in Washington, perhaps because upbeat earnings loomed more important than shutdown worries. It is impossible to tell if that particular shutdown would have ultimately led to a market correction in the subsequent days because a bill was signed later that evening.

Shutdown indifference isn't anything new. Charles Schwab crunched the numbers for the previous 18 shutdowns, spanning from 1976 to 2013, and found that the median change in the S&P 500 over the course of a shutdown was remarkably 0.0%, while the mean change was a paltry -0.6%.

While government shutdowns historically have had little impact on overall market performance, budget disagreements contrarily can have a profound effect. For example, following a bitter fight over the debt ceiling in 2011, the S&P index dropped 6.7% the following trading day.