The U.S. government partially shut down on December 22, 2018, when Congress could not agree on a funding deal. On January 25th, 2019, President Donald Trump and congressional leaders struck a deal to re-open the government for three weeks, while they ironed out a broader agreement. The sticking point was Trump's insistence that a funding bill include $5 billion with which to build a southern border wall between the U.S. and Mexico, which congressional Democrats refused to support.

During the shutdown, some 800,000 federal government employees were denied wages for their 34 days of work, although they've since received back pay. Several government offices were closed, including parts of the Internal Revenue Service, and the Securities and Exchange Commission. However, the military remained open, thanks to a resolution passed earlier in the year.

Key Takeaways

  • An LPL Financial study that examined stock market activity over 18 government shutdowns, spanning the period from 1976 to 2013, found that shutdowns have remarkably little impact on performance, as the median change in the S&P 500 was 0.0%. 
  • Contrarily, budget debates significantly effect stock performance, such as when the S&P index fell 6.7% following a bitter 2011 fight over the debt ceiling.

How Do Government Shutdowns Affect the Stock Market?

The last government shutdown lasted for 69 hours, beginning on Saturday, January 20, 2018, which was triggered by Congress' failure to pass a bill funding the government, largely due to disagreements over immigration policy. When the market opened to a still-shuttered government on the morning of Monday, January 22, stocks surprisingly rose 0.8%. Clearly, investors weren't dissuaded by the tumult in Washington, perhaps because upbeat earnings loomed more important than shutdown worries. It is impossible to tell if that particular shutdown would have ultimately led to a market correction in the subsequent days because a bill was signed later that evening.

Shutdown indifference isn't anything new. Charles Schwab crunched the numbers for the previous 18 shutdowns, spanning from 1976 to 2013, and found that the median change in the S&P 500 over the course of a shutdown was remarkably 0.0%, while the mean change was a paltry -0.6%.

While government shutdowns historically have had little impact on overall market performance, budget disagreements contrarily can have a profound effect. For example, following a bitter fight over the debt ceiling in 2011, the S&P index dropped 6.7% the following trading day.