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Why a government shutdown is unlikely to alter the stock market's course

August 28, 2025
Magdalena Ocampo
Market Strategist
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With less than two months until the end of the fiscal year, concerns about a government shutdown this fall could add to market noise and volatility. Historically, the impact of a shutdown on the U.S. economy has been marginal and temporary. Even if headlines grow more urgent, investors should keep in mind that the stock market has generally proven resilient through these short-lived funding gaps.

Odds of a government shutdown are still unclear

Government funding, set to expire on September 30, has remained unresolved since Congress left Washington for the August recess. This means that once Congress returns in September, they will have just four weeks to either finalize government spending or extend the deadline. In the meantime, political tensions persist between Republicans and Democrats, as well as within the parties themselves.

On one hand, Democratic frustration toward Republicans intensified after the OBBBA was passed, raising concerns that the Democrats will resist cutting a deal with Republicans and push for a shutdown this fall. On the other hand, growing divisions in the Republican Party have disrupted the legislative process, blocking Republicans from introducing new bills. Given how the first part of the year unfolded between the two parties, it’s unclear if a deal to avoid a government shutdown will be reached in time.

Government shutdowns have a marginal and temporary impact on the economy

Government shutdowns tend to generate noise, but their direct economic impact is fairly limited. Roughly three-quarters of federal spending is mandatory and continues uninterrupted. Key entitlement programs—Social Security, Medicare, and Medicaid—do not require annual appropriations, so beneficiaries continue to receive payments, keeping their spending largely unchanged.

The labor impact is also narrower than headlines suggest. Federal employees make up less than 2% of the U.S. workforce. During a shutdown, some are furloughed while others deemed essential continue working. In both cases, federal employees typically receive back pay once the government reopens, which helps sustain household spending despite temporary disruptions. Considering the relatively small portion of the economy that is affected by a shutdown, the estimated economic impact has typically been minimal and temporary. The Congressional Budget Office, which estimated a larger impact of the shutdown on the economy compared to other organizations, projected that during the 2018-19 shutdown, the level of real GDP in Q4’18 and Q1’19 was reduced by only $3 billion and $8 billion, respectively, reflecting lower federal spending on goods and services and just a temporary dip in demand.

The stock market has been largely unfazed by historical shutdowns

Historically, government shutdowns have had little lasting effect on equity markets, particularly when debt-ceiling risks weren’t in play. Over the past ten government shutdown episodes since the 1980s, the S&P 500’s reaction has not been meaningful. During those shutdown periods, which ranged from a couple of days to a couple of weeks, the S&P 500 showed little reaction. Furthermore, the stock market then posted strong positive returns in the 6 and 12 month periods following the shutdowns in all but one instance. The lone exception was January 2018, but that year’s market decline occurred months later in Q4 and stemmed from slowing growth and earnings concerns—not the brief shutdown itself.
U.S. government shutdowns and S&P 500 price return
President Funding end Funding restored Duration (days) During shutdown 6 months after 12 months after
Ronald Reagan 11/20/1981 11/23/1981 2 -0.1% -5.5% 12.6%
Ronald Reagan 09/30/1982 10/02/1982 1 1.3% 24.3% 37.9%
Ronald Reagan 10/03/1984 10/05/1984 1 0.1% 11.4% 13.5%
Ronald Reagan 10/16/1986 10/18/1986 1 -0.3% 16.9% 18.0%
George H.W. Bush 10/05/1990 10/09/1990 3 -2.1% 24.2% 22.4%
Bill Clinton 11/13/1995 11/19/1995 5 1.3% 8.7% 23.2%
Bill Clinton 12/15/1995 01/06/1996 21 0.1% 8.5% 18.2%
Barack Obama 09/30/2013 10/17/2013 16 3.1% 7.2% 17.3%
Donald Trump 01/19/2018 01/22/2018 2 0.8% -0.6% -5.0%
Donald Trump 12/21/2018 01/25/2019 34 10.3% 9.8% 33.3%
Average   8.6 1.5% 10.5% 19.1%
Median   2.5 0.5% 9.2% 18.1%

Source: Bloomberg, History, “How Many Times Has the US Government Shut Down?”. History, Art & Archives, U.S. House of Representatives, “Funding Gaps and Shutdowns in the Federal Government”, Principal Asset Management.

Implications for investors

Ultimately, stock market performance largely reflects the broader economic backdrop. Since government shutdowns generally have little effect on growth, history highlights that subsequent market impacts are typically short lived, ending up as blips in the stock market’s memory. Therefore, as the government funding deadline approaches this September, investors would be wise to look past the short-term noise and focus on the economic fundamentals, which remain resilient.

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