Impact on Markets of a Government Shutdown

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This article was authored by:  Michael Gray

Congress is required to pass a budget annually but has failed to do so on time in 94% of the past 33 years. Historically, S&P 500 performance rebounds after shutdowns, with markets largely unfazed by political brinkmanship. Breakdown of the Federal Government’s $6.8 Trillion Budget in Fiscal Year 2024: Mandatory programs are the largest segment, representing 61% of the total budget and include Social Security, Medicare and Medicaid, which are 22%, 13% and 9% of total spending, respectively. Discretionary Spending is the next largest component at 27% of spending, broken into Non-Defense Spending at 14% and Defense Spending at 13%. Interest Payments on the National Debt at 13% of total spending. Mandatory Spending and Interest Payments do not require annual approval by Congress because they are already authorized by pre-existing laws. Consequently, the only annual requirement for Congress is to pass legislation which covers the Discretionary Spending portion, which, again, covers 27% of Total Government Spending. These bills must become law by September 30th each year to fund the government for the next fiscal year. If the Appropriations Bills are not signed into law, then on October 1st a Government Shutdown occurs, because the government cannot legally fund the agencies covered by the appropriations. Over the past thirty-three years, Congress has only passed into law all of the required Appropriations Bills twice, with the most recent being in FY 1997. Congress has failed to complete its legislative duties in 31 of 33 years, or 94% of the time. Congress does have one out, however, to prevent a shutdown, which is to pass a Continuing Resolution. A Continuing Resolution is a temporary measure that extends funding at existing levels to allow lawmakers more time to reach an agreement. Congress has not yet passed into law a single Appropriations Bill for FY2026. Nor have they signed a Continuing Resolution. There have been 6 Government Shutdowns, although two of them lasted for less than three days. The other 4 lasted an average of 19 days each. Mandatory Spending is not affected, so Social Security, Medicare and Medicaid benefits still go out. The Treasury is still able to pay on its debt obligations. The majority of federal employees, roughly 65% would continue working, since they are considered essential workers. Goldman Sachs has estimated that a government shutdown might reduce growth by 0.15% per week, but it would only be temporary. Growth would rise by a similar amount once operations are reopened. The Congressional Budget Office estimated that the 2018-2019 shutdown, which at 35 days was the longest on record, reduced GDP by $11 billion. However, $9 billion of that was recovered the following quarter. Overall, the economic impact of a shutdown is modest, unless the shutdown lasts for an extended period. Historically, Government Shutdowns have not had a negative impact on stocks, as the S&P 500 Index has gained an average of 5.5% over the ensuing 40-day period following the shutdown. The stock market initially declines around Government Shutdowns but quickly rebounds. One thing that is different this year, however, is that the Office of Management and Budget have told federal agencies impacted by funding cutoffs to prepare for the potential permanent reduction in jobs. Additionally, if a shutdown occurs for an extended period, it could delay the release of critical government statistics, which will disrupt the regular flow of information markets rely on.