What Investors Need to Know About a Government Shutdown

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Key Takeaways

In the 21 funding disruptions since 1976, the S&P 500 has averaged gains of 0.1% during the standoffs and 12.2% over the ensuing 12-month periods.

A partial work stoppage could cost the economy about 0.15–0.20% per week, but it would likely be offset by a spending rebound once regular activity resumed.1

We view the shutdown as disconcerting but largely a distraction; our teams remain focused primarily on the direction of interest rates and labor as macro market drivers.

Despite causing disruptions to many areas of government, budget impasses have historically had little lasting impact on markets, and this time will likely be similar.

The start of the federal government’s fiscal year on October 1 is fast approaching, and Congress is locked in a standoff over all 12 of its appropriation bills. While there’s still a chance to reach a deal and avert a work stoppage, it’s a big hurdle. So, with the government’s discretionary checkbook likely to be revoked, two questions are top of mind for investors: What does it mean for markets, and could this tip the economy into a downturn? Fortunately, there’s plenty of data to help shed light on the answers.

Exhibit 1: Uncertainty creates near-term volatility…
S&P 500 standard deviation
Exhibit 1: Uncertainty creates near-term volatility…

As of 09/25/23. Source: Bloomberg, Voya IM.

Markets tend to shrug off shutdowns

Since 1976, there have been 21 instances in which a failure to enact appropriations bills has halted the U.S. government. While most shutdowns were resolved within a week, a few extended longer, the most recent, in 2018, lasted 34 days. That one had just 7 unpassed appropriations bills — this year, it’s all 12. That doesn’t mean this shutdown will necessarily last that long, but it underscores the challenge facing Congress in negotiating a wider breadth of department and agency funding.

The market’s immediate reaction can be noisy. Stock volatility rose in roughly two-thirds of the stoppages (Exhibit 1). While the S&P 500’s average return during shutdowns was 0.1%, reactions have been divided almost evenly between gains and losses — so don’t be surprised if the market turns briefly negative. However, drawdowns were typically modest and short-lived.

The good news is that government closures have historically had virtually no long-term impact. In the 12-month periods following shutdowns, the S&P 500 has gained an average of 12.2% (Exhibit 2).

Exhibit 2: …but performance is largely unaffected
S&P 500 returns during and after shutdowns
Exhibit 2: …but performance is largely unaffected

As of 09/25/23. Source: Bloomberg, Voya IM.

Economic drag should reverse in short order

With this year’s squabble involving all 12 bills, some government services will still proceed as normal, while others may cease. Essential services — air traffic control, border control and mandatory spending programs not covered by appropriations (such as Medicare) — continue to function through these periods (often requiring federal workers to show up without pay). But non-essential discretionary spending stops or is delayed. For example, disruptions may occur at the Food and Drug Administration, the National Park Service and the National Institutes of Health. In addition, some agencies may need to postpone data reporting; this could include critical economic indicators that are closely watched by the Federal Reserve and the market.

Goldman Sachs estimates that reduced government spending could shave about 0.15%–0.20% from GDP growth each week the work stoppage lasts. However, that spending would still occur, just later than intended, eventually netting out. In other words, the shutdown shouldn’t pose a threat to the economy, despite the troubling long-term implications of the government’s inability to function.

Another concern is the U.S. credit rating. On August 1, 2023, rating agency Fitch downgraded U.S. sovereign debt from AAA to AA+ (but with a stable outlook). Its reasoning was multifold, but a key determinant was the repeated debt-limit standoffs and last-minute resolutions between the opposing political parties. This standoff seems to confirm Fitch’s viewpoint.

Other macro factors matter more than a shutdown

A government shutdown may add noise to an already raucous market. However, it doesn’t affect how we assess companies, select securities or allocate to sectors, industries and regions. Instead, our macro focus remains on the Fed and interest rates, labor trends, and GDP growth.

A meaningful delay in data releases would be unwelcome, as the Fed’s interest rate decisions are data dependent. The market doesn’t operate well with unknowns, so a lack of data may heighten uncertainty and ramp up market volatility. At the same time, ambiguity caused by macro noise can create market dislocations and potential opportunities to find quality investments at more attractive prices.

Overall, we don’t anticipate a strong market reaction in either direction. Of course, this event could deviate from past examples. So, while we expect more buzz than sting, we will continue to monitor the unfolding situation.


1 Goldman Sachs Research; 09/09/23.

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