As we enter the second week of the government shutdown, the US stock market as measured by the S&P 500 remains resilient, rising slightly from the market close of 6,688.46 on September 30, 2025.
The lack of a material market reaction is likely the result of a combination of factors. First, the pillars of support for the market this year remain largely intact; these are solid growth, falling interest rates (and expectations for additional Fed Funds rate cuts), stable inflation and AI enthusiasm.
Additionally, government shutdowns have historically had limited implications on financial markets. Excluding the current shutdown, there have been ten government shutdowns since 1981. S&P 500 results for the periods 1-month, 3-months and 6-months from the market closing value on the day before each shutdown is listed below:
- 1-month returns have averaged +3.0%, positive results in 7 of 10 instances.
- 3-month returns have averaged +6.0%, positive results in 8 of 10 instances.
- 6-month returns have averaged +11.9%, positive results in 9 of 10 instances.
(Source: Bloomberg, First Trust Advisors. Data from 11/20/1981 – 9/30/2025)
Markets shrugging off government shutdowns is likely because investors are focused more on long-term macroeconomic trends and corporate profits, which are not largely impacted.
Near-term, the biggest potential impact on the markets is a lack of data from government agencies. Investors will be operating somewhat blind as it relates to incoming data on labor, CPI and retail sales from the Bureau of Labor Statistics (BLS). There are private sources, such as Automatic Data Processing (ADP), that provide at least partial data, but the BLS is an important source that will be unavailable during the shutdown. This is perhaps most significant as it relates to the Federal Reserve who has cited deteriorating labor trends as a reason for starting their rate cuts. With Chairman Powell’s guidance in the September meeting, it seems likely another rate cut will be made in October even if the shutdown persists. However, the lack of data does muddy the waters and could give the Fed an excuse to pause. A pause to rate cuts would likely be a negative for the markets as futures are pricing in two more rate cuts in 2025.
Key Information About Government Shutdowns
Mandatory spending such as Social Security, Medicare, and Medicaid is not impacted by a government shutdown as they are funded automatically by existing laws and do not depend on the annual budget process. Application processing could be delayed, but Social Security checks and medical coverage will remain active.
Discretionary spending, which makes up about a quarter of the government budget, is impacted by the government shutdown and includes defense (roughly half of the discretionary spending), agriculture, education and transportation, among others. Within the areas impacted by the freeze on discretionary spending, there are numerous essential functions that are expected to continue, and unfortunately many federal workers will be asked to continue working without pay. With an estimated 750,000 federal employees furloughed each day of the shutdown, we all likely know someone who has been impacted.
We hope all will rally around these individuals, and we are hopeful the two sides will come together soon to reopen the government. We are monitoring developments closely. From a purely financial standpoint, this does not have to become a crisis for financial markets, but the longer it carries on the more damaging it could become. Past precedent suggests this is not yet a time to actively de-risk.