How Do Government Shutdowns Affect Markets?

President Donald Trump’s One Big Beautiful Bill Act captured most of this summer’s news about the federal government’s fiscal policy. However, as we approach fall, ongoing tensions between Republicans and Democrats have triggered what seems to be an annual event: a potential government shutdown.

The federal government’s fiscal year begins on October 1, and Congress has yet to approve any of the 12 appropriations bills. A shutdown could result if Congress fails to act on these bills or implement stopgap measures to keep the government operational.

Fortunately for investors, government shutdowns usually have more bark than bite. They typically don’t last long, and while market volatility may increase as deadlines approach and during actual shutdowns, stocks have generally recovered quickly once the shutdown ends.

We believe investors should avoid making investment decisions based solely on concerns about government shutdowns. Maintaining a consistent and sound investment strategy is typically the best approach for long-term success, regardless of short-term circumstances.

How Congress Handles Annual Government Funding

Each year, Congress must approve spending for the federal government’s fiscal year by September 30. In the spring, the House and Senate Finance Committees begin working on 12 regular appropriations bills to fund the departments of defense, agriculture, energy, labor and veterans affairs, among others.

However, Congress often struggles to pass all the necessary bills on time, with the last successful instance occurring in 1996.¹ Political disagreements between the two parties frequently lead to deadlocks.

When Congress can’t agree on appropriations bills, it can pass a continuing resolution to keep the government running while negotiations continue. For example, the government has operated throughout 2025 under a full-year continuing resolution that kept funding levels similar to fiscal year 2024.²

Government Shutdowns Explained

A government shutdown occurs when Congress fails to pass the necessary appropriations bills or a continuing resolution by midnight on September 30. A shutdown only affects the expenses tied to the appropriations bills that Congress hasn’t approved.

Since there are 12 funding bills, the impact of a shutdown can differ depending on which bills have been passed and which agencies still have the legal authority to spend money. Many federal agencies must halt or scale back their operations on October 1 if they lack legal permission to continue spending.

Government shutdowns only affect programs funded through discretionary spending, which accounted for 27% of the government’s total budget in 2024 (see Figure 1). They don’t affect mandatory programs like Social Security, Medicare or Medicaid because they receive funding through separate long-term mechanisms.

Other essential services like postal delivery also continue, and shutdowns don’t affect the government’s ability to pay interest on its debt.

Nonetheless, a shutdown can impact other government functions and programs, like scientific research, passport and visa processing and food safety inspections.

How Common Are Government Shutdowns?

Figure 2 shows that there have been 20 government shutdowns since 1976, most occurring in the 70s and 80s.

The average duration of these shutdowns was eight days. Half lasted three days or fewer, while seven extended to 10 days or more.

How Do Government Shutdowns Affect the Economy?

While short-term U.S. government shutdowns may be disruptive and erode public confidence in political leadership, they typically have minimal long-term economic impact. However, prolonged shutdowns can lead to more significant — though mostly temporary — economic consequences.

Each week of a shutdown could reduce gross domestic product (GDP) growth by approximately 0.2 percentage points (annualized), with a rebound of similar magnitude expected in the quarter following the shutdown resolution.³

The Congressional Budget Office (CBO) examined the five-week partial shutdown from late 2018 to early 2019. The shutdown caused a 0.1% decline in GDP during Q4 2018 and a 0.2% decline in Q1 2019, mainly due to lost wages for furloughed federal employees and postponed government spending.

Although most of the lost output was eventually recovered, the CBO estimated that the economy permanently lost $3 billion, roughly 0.02% of 2019 GDP. These numbers do not account for indirect impacts like delays in federal permits or loan applications.

These economic effects, while often modest and temporary, still play a key role in shaping how financial markets respond to government shutdowns.

How Have Markets Responded to Past Government Shutdowns?

While the threat of a government shutdown often makes headlines, the market tends to ignore the excitement. As Figure 3 shows, stock performance during shutdowns has been mixed, ranging from a drop of 4.4% in October 1979 to a gain of 10.3% in the 2018-2019 shutdown.

More importantly, our research shows that stocks have generally risen in the 12 months after a shutdown ends. Since 1976, the S&P 500® Index has posted solid gains in the year following 18 of 20 U.S. government shutdowns.

Managing Uncertainty During Government Gridlock

The recurring threat of a federal government shutdown often generates headlines, but financial markets have historically demonstrated strong resilience during these periods. Data shows that investors who remained committed through the uncertainty were rewarded with positive returns in the following months.

This trend highlights the value of staying focused on long-term goals amid short-term political disruptions.