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How would a government shutdown affect market volatility?
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Key takeaways
October 1 deadline
If Congress doesn't pass a spending bill or continuing resolution by October 1, parts of the government will start to shut down.
Limited market impact?
Many past shutdowns (but not all) led to market volatility, which tended to resolve quickly with limited to no impact.
Think long-term
Don’t let any short-term market volatility from a government shutdown change your long-term investing plan.
With elections fast approaching, the US government may be on the verge of a shutdown. Congress recently voted down a six-month funding measure that included a provision requiring proof of citizenship when registering to vote. Without a new budget or stopgap, a partial shutdown could begin October 1 with a full shutdown to follow. Long periods of policy uncertainty generally lead to market volatility. But past shutdowns have tended to resolve quickly with little market impact. Sticking to a long-term investment plan may be the best way forward. Here are three things for investors to remember about government shutdowns.
1. Government shutdowns tend to resolve quickly
There have been 21 government shutdowns in US history according to the US Treasury. They’ve been resolved, on average, within eight days. Five only lasted a day. The longest lasted 34 days.1
2. Market volatility increased in some, but not all, past shutdowns
Market volatility often results from policy uncertainty. While there are examples of heightened volatility, for the most part, it’s been generally benign during past government shutdowns.
Not all government shutdowns created market volatility
Source: Bloomberg L.P., 12/31/22. The Dow Jones Industrial Average is a price-weighted index of the 30 largest, most widely held stocks traded on the New York Stock Exchange. Volatility is measured by the standard deviation of price moves on returns of the index. Standard deviation measures a range of total returns for a portfolio or index compared to the mean. An investment cannot be made into an index. Past performance does not guarantee future results.
3. Stocks, on average, advanced despite government shutdowns
While the S&P 500 Index, on average, churned in the days leading up to and during government shutdowns, it advanced in the aftermath.2 The Index also posted positive returns during 12 of the 21 government shutdowns. The average return during the shutdowns is 0.1%.3 (Remember, shutdowns have been resolved, on average, within eight days.) Plus, despite experiencing 21 government shutdowns along the way, a $100,000 investment in the S&P 500 Index in 1957 would be worth $12.2 million today.4
Stick to long-term investing plans
While unnerving, concerns about shutdowns shouldn’t change investors’ long-term investment plans. This wouldn't be the first government shutdown, and it likely wouldn't be the last. Ultimately, I’d expect the spending bills to pass without incident. As Winston Churchill may have said, “Americans always do the right thing, but only after exhausting all other options.”
Footnotes
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1
Source: US Treasury, 8/31/23
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2
Source: Bloomberg L.P., 8/31/2023. An investment cannot be made into an index. Past performance does not guarantee future results.
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3
Source: Bloomberg, L.P. 12/31/22. An investment cannot be made into an index. Past performance does not guarantee future results.
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4
Sources: Bloomberg L.P., 9/19/24. The S&P 500 Index is a market-capitalization-weighted index of the 500 largest domestic US stocks. An investment cannot be made into an index. Past performance does not guarantee future results.
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