Government Shutdowns: Why Investors Rarely Care
Historically, US government shutdowns have had minimal impact on the stock market. Let’s review the graphic below. Since 1976, government shutdowns of varying lengths have had little effect on stocks, as measured by the S&P 500 Index.
The government closure began at midnight on October 1. So far, the major indexes have continued to grind higher, with both the Dow and the S&P 500 notching new highs on October 1, 2, and 3. The Nasdaq closed at an all-time high on the 2nd, according to data from MarketWatch.
Political drama and investor indifference
Why do investors typically shrug off a shutdown? While they affect government operations that aren’t deemed essential, they have a limited impact on the overall economy, and they do not affect Social Security payments, which helps support overall spending.
For the most part, it’s headline risk. And, so far, even that hasn’t affected the broader market.
You see, investors are much more concerned about longer-term economic fundamentals.
They focus on corporate profits, interest rates, the general economy—which drives profits—and inflation. If a shutdown has little impact on the economy, it stands to reason that it would probably have little medium- and longer-term impact on stocks.
Meanwhile, the Federal Reserve has grown increasingly concerned about the softening labor market. The unemployment rate is low but has been gradually increasing, while hiring has slowed.
Scheduled for an October 3 release, September’s employment report from the US BLS was delayed due to the shutdown.
While a weaker labor market typically raises concerns about what may be happening in the economy, there has been a curious disconnect between job growth and the broader economy.
One broad measure of economic output is the Atlanta Fed’s GDPNow model. Through October 1, which includes data from July and August, Q3 GDP is tracking at a robust 3.8% annualized pace.
For investors, shutdowns dominate headlines, but history suggests minimal market impact.