What a shutdown means for markets

It feels like Americans have faced an imminent government shutdown more often than another Fast and Furious reboot.

But while investors have seemingly become desensitized to political brinksmanship, the government shutdown expected to start Wednesday could be particularly painful for the economy.

Historically, government shutdowns haven’t rocked financial markets, despite the local impact felt in DC. Part of the reason the economy has largely been spared in past shutdowns is because a) they’ve been short-lived, b) economic data disruptions were limited thanks to leftover funding in some agencies, and c) investors broadly saw them more as political noise than a major shock to the economy.

Wall Street shakes it off: Since 1976, the S&P 500 has not moved on average during a government shutdown, according to CNN. In fact, over the 35 days of the 2018–2019 shutdown, the S&P 500 gained 10%.

Why the stakes are higher now

Investors might not be as blasé this time around. After all, the economy is already in a precarious place: The job market is cooling, inflation has remained sticky, and the Trump administration has been launching more overt attacks on the Federal Reserve’s independence, which could shake investor confidence in US institutions.

That’s why any lapse in economic data as a result of the shutdown could lead to corporate America and the Fed taking shots in the dark. Already, the Labor Department warned it won’t release a key jobs report on Friday if the government’s lights go dark. And that would just be the beginning of the data blackout, depending on how long the shutdown lasts. The mid-October CPI data is set to be a particularly vital inflation metric for Jerome Powell.

On top of those concerns, while federal workers have been furloughed in the past then brought back to work once a funding agreement is reached, the White House has directed agencies to conduct mass layoffs if the shutdown persists.

All that being said, many analysts think this shutdown will once again be more of a blip than a crash: “We advise investors to look past shutdown fears and focus on other market drivers, such as the mix of continued Fed rate cuts, strong corporate earnings, and robust AI capex and monetization,” explained UBS Global Head of Equities Ulrike Hoffmann-Burchardi in a note today. —LB