Government Shutdown: Should Investors Panic? Historical Data

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Government Shutdown Alert: What It Means for Your Investments

Here we are. It's yet again, the eve before the eve when the government might shut down. So I'm releasing this episode a little early because I know that when you open up your phone or turn on your TV, you are seeing these headlines about a government shutdown.

So what I want to do is unpack this sucker just a little bit, help us understand what it is, why it might actually impact us, and specifically how this impacts investments.

The Basics: What Is a Government Shutdown?

Congress has to pass a spending bill in order to fund the government for every fiscal year. And the fiscal year for our government ends on September 30th, which is just a few days from now. And we need a new one on October 1st.

So if they don't pass a budget or a temporary extension, which is called a continuing resolution, then the government shuts down.

Now, people, this isn't just a total shutdown, but it affects about 27% of government spending. So things like Social Security and Medicare payments continue. The post office keeps delivering mail, and interest on government debt gets paid, that kind of stuff.

But what stops is things like national parks would close down. We can't get new passports, federal courts eventually run out of funds and so they shut down, stuff like that.

The Thing That Matters for Markets

But the thing that is critical for the markets, listen up, is that if the government shuts down, the economic data releases stop—things like the jobs reports and inflation data.

Why Is This a Threat Right Now?

Well, it's because of a political standoff, right? So the Republicans control the House, the Senate, and the White House, and they need something like 60 votes in the Senate requiring something like seven Democrats to provide a vote.

So the Democrats are absolutely demanding an extension of the Affordable Care Act subsidies, which is basically the money they provide to subsidize the cost of health insurance for people who can't afford it. And Republicans want a clean spending bill—clean in air quotes—because they don't want to have any additional adds to it.

So Trump canceled his meeting with the Democratic leaders calling their demands insane. So all that going on means that we have a president who isn't playing ball with the opposing party and it could create a shutdown.

The Twist: This One Might Be Different

Here's the twist. Trump is actually viewing this as an opportunity to shrink the government permanently. So the Office of Management and Budget actually issued an unprecedented memo, which basically is directing agencies to prepare for permanent layoffs during a shutdown, not just furloughs, actual firings of federal workers.

So this particular shutdown appears to be more severe than the past ones.

Historical Market Performance During Shutdowns

Now, let's talk about how all of that historically impacts the market performance during shutdowns. I'm going to always remind you guys that when we are investing in parts of the stock market or the whole of it, that the stock market is a place that we purchase fractional shares of companies and we participate in their profits and at times their losses.

So how does a government shutdown impact private companies—excuse me, publicly traded companies—that are running a business for profit? Well, there's some impact. So let's talk about it.

There have been 20 government shutdowns since 1976, and they last an average of eight days. Half of them lasted three days or less.

Now, historically, the S&P 500, which is kind of the way we measure the stock market as a whole, actually gained 55% of the time during shutdowns. And the average return during a shutdown, those shutdowns of three to eight days, was about upside 0.3%.

Historically, 12 months after a shutdown, the S&P 500 is higher 86% of the time.

So we don't really need to be afraid of this as investors.

As Citizens vs. As Investors

Now, as citizens, we get to think about this under a different set of thoughts. As citizens, this, of course, is concerning, but it's also a lot of hype, and it's a bunch of news cycle sound bites, right?

What I'm Watching For

So if there's something to be concerned about as investors, my opinion on this is, what if this is Trump's opportunity to make the shutdown more permanent with layoffs? Well, that's going to have impact for us as investors.

If we have a blackout that's as long as the one that we had back in 2018 and 2019—and what I mean by a blackout is an economic data blackout where the people that work at the government that provide information about the jobs report and inflation and things like that that directly impacts our investments—so that data is important.

The Bottom Line

So stay tuned, but don't panic.

Government shutdowns have happened 20 times since 1976, and historically they haven't hurt investors. The S&P 500 has actually gained more often than not during shutdowns, and markets are typically higher a year later. The real concern this time is if Trump uses it as an opportunity to permanently downsize government, which could create a longer economic data blackout that would make it harder to make informed investment decisions.

But for now, this is more news cycle drama than investment crisis. Keep calm and carry on.