Government shutdowns

The latest US government shutdown has sparked headlines and stirred market anxiety. But over the past 40 years, equity and treasury markets have shrugged off these political hiccups with remarkable indifference. A look back at historical patterns reveals a reassuring story: while shutdowns tend to rattle nerves briefly, they have never caused lasting harm. 

 

The S&P 500 has often fared surprisingly well during government shutdowns, posting flat or positive returns during 10 of the last 13 instances (Figure 1). The largest decline (2.2%) occurred during the brief two-day shutdown from Sep. 30 to Oct. 3, 1984. In contrast, during the record 35-day shutdown of 2018-2019, the S&P 500 surged more than 9%, driven more by dovish Federal Reserve policies than by any direct market reaction to the shutdown itself.

 

Source: S&P Dow Jones Indices, Axioma by SimCorp

This equity market resilience can be attributed to the fact that government shutdowns typically result in only a temporary halt to certain federal expenditures, without significantly disrupting the broader economy or corporate earnings, highlighting that markets tend to react more to economic fundamentals than political gridlock. 

The stock market’s relative calm was also evident in the minimal changes to the short-term risk forecast for the S&P 500 index, as measured by the Axioma US5.1 fundamental model. Notably, the shutdowns between 1982 and 1995 showed no change in risk. During the longest shutdown, forecast risk actually declined the most (by 35 basis points), while the largest increase in risk was a modest 54 basis points during the 2013 shutdown (Figure 2). 

Figure 2: Short-Horizon Predicted Risk Changes for the S&P 500

Source: S&P Dow Jones Indices, Axioma US5.1 Fundamental Short-Horizon Risk Model

Treasury markets have shown a similar pattern of calm during government shutdowns. These events typically lead to mixed and modest fluctuations in bond yields. For instance, both 2-year and 10-year Treasury yields rose during the 1986 and 1990 shutdowns, but declined in about half of the cases overall (Figure 3). 

Importantly, Treasury payments continue uninterrupted, as shutdowns do not impact the government's debt obligations, except in cases linked to separate debt ceiling crises. For bondholders, the key concern is receiving their payments on time, not whether federal employees are getting paid. 

Figure 3: Changes in 10-Year and 2-Year Treasury Yields

Source: S&P Dow Jones Indices, Axioma 

The clear takeaway is that government shutdowns rarely have a meaningful impact on markets. They are primarily political events with limited influence on economic fundamentals. As shutdowns become more frequent, maintaining a long-term perspective, rather than reacting to short-term political noise, remains the most effective strategy for navigating uncertainty.