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Congress failed to pass a funding bill for the federal fiscal year beginning October 1, which means that the government has officially shut down.
But what does that really mean – and more importantly, what does it mean for investors?
It means that all non-essential government functions are halted until the funding bill is passed. So that means many federal agencies like the EPA and NASA shutdown, along with national parks and museums, are closed, among other things.
Essential functions like the post office, law enforcement, federal hospitals, air traffic control and air travel, social programs like Social Security and Medicare, and federal courts, among others, stay open.
Shutdowns are not common, but they also aren’t unusual. There have been 21 government shutdowns since 1976, with the last coming in 2018.
According to an analysis by Adam Turnquist, chief technical strategist for LPL Financial, the shutdowns have lasted an average of eight days. The longest was the last one, which spanned 34 days from December 22, 2018, to January 25, 2019.
Markets have largely tuned them out, as the average stock market decline across the 21 shutdowns is about 1.8%, according to LPL. The worst was in 1979 when the S&P 500 dropped about 4% during the shutdown. The best was the 2018-2019 shutdown when the market actually gained 10% because it forced the Federal Reserve to pivot from a more hawkish monetary policy stance to a dovish one, said Turnquist.
Turnquist also noted that the average one- and three-month returns for the S&P 500 after the budgets were approved were 1.2% and 2.9%, respectively.
How Should Investors React?
On Wednesday, the first day of the 2025 shutdown, markets were mostly flat, with the S&P 500 and Nasdaq Composite treading water while the Dow was up about 85 points.
On average, the S&P 500 has historically been about flat during shutdowns, with a slightly higher probability of gains vs. losses since 1976,” Jeff Buchbinder, chief equity strategist for LPL Financial, said. “Considering that most of the losses came during the late 1970s, and the biggest decline during a shutdown since 1980 was 2.2%, history suggests stocks have a good chance of going higher during this shutdown, though past performance does not guarantee future results.”
Strategists at Vanguard Group advise investors to “tune out the noise” and stick to their investment plan.
“Although there can be market volatility during a shutdown, history reveals no clear relationship between shutdowns and market returns,” Vanguard strategists said. “Markets might experience heightened volatility in response to the uncertainty in Washington. However, markets have historically had mixed reactions to government shutdowns, with equities finishing in positive territory more than half the time.”
In the seven cases where shutdowns have lasted for 10 days or more, the S&P 500 fell four times within the shutdown period and rose three times.
“What’s most important is that investors remain disciplined, diversified, and patient during such an event,” Vanguard strategists said.