What would a government shutdown mean for the markets?

It is usually impossible to predict the news agenda for an entire year, but some events recur regularly, increasing the likelihood that they will happen again. One such event is the looming U.S. government shutdown if Congress fails to pass a spending bill, with the current deadline expiring on Tuesday.

If the parties fail to reach an agreement by then, the country could be paralyzed — albeit only partially: non-essential government agencies would shut down, leaving thousands of employees without pay, while essential services — such as the military and healthcare workers — would continue to operate as usual.

As for the market, it typically reacts only mildly to a government shutdown. It has happened four times in the past 20 years — three occurred during Trump's presidency — and the S&P 500 grew in each case. Even when the 2019 shutdown stretched beyond 30 days, there was no sign of panic among investors.

A muted reaction is mainly due to the expectation that lawmakers will eventually reach an agreement, so there is no reason to panic. It is also helpful to remember that the stock market does not reflect the entire economy or GDP, but rather represents the business sector, specifically the listed companies.

However, that doesn't mean a shutdown comes without economic consequences. According to Goldman Sachs, a shutdown reduces GDP growth by about 0.15% each week. For perspective, the most expensive shutdown in U.S. history, from 2018 to 2019, lasted 35 days and cost the economy $3 billion.

If the shutdown drags on, the country's credit rating could also be affected. That happened in 2023, when Fitch cited a perceived deterioration in U.S. governance and expressed less confidence in the government's ability to manage fiscal and debt issues. Those concerns could trigger volatility in the U.S. debt market.

How might investors react to a government shutdown this time around?

The country already faces multiple challenges, including rising debt throughout the year, overvalued artificial intelligence companies, and the risk of continued inflation driven by trade tensions, especially with new tariffs on medicines, heavy trucks, and furniture starting October 1, but the markets seem immune.

This calm seems to stem from expectations that the Fed will continue to cut interest rates, but there is still a risk that the rhetoric will shift. The Federal Reserve Bank of Kansas City president has already said that policy is “in the right place,” while his counterpart in Chicago has warned against cutting too quickly.