Government Shutdowns and Their Historical Effect on the Stock Market

This blog incorporates content used with permission from Dimensional Fund Advisors, “Above the Fray: Shutdown Watch 2023”, by Wes Crill, PhD.

Congress narrowly avoided a government shutdown by passing a temporary spending bill on September 29 that will fund the government until November 17. With the House of Representatives having trouble selecting a new speaker many are worried that they will have trouble passing a spending bill which would cause a government shutdown.

Should you also be worried? It’s helpful to look at what has happened to the stock market during past shutdowns. In the blog below by Wes Crill of Dimensional Fund Advisors, he addresses what has happened to the stock market during past government shutdowns and draws the following conclusion, “So, while a shutdown may be a nuisance, history suggests it’s probably not cause for concern in your portfolio.”

With the permission of Dimensional Fund Advisors, we reprinted Wes’s blog below for you to read. Feel free to give us a call if you would like to discuss it in greater detail. 

Government Shutdowns and Their Historical Effect on the Stock Market

The US government temporarily averted a shutdown after the House and Senate passed a 45-day funding deal on September 29. But the specter of a shutdown still looms if a longer-term funding resolution fails to materialize before the stopgap ends. 

The US government has faced 14 funding gaps since 1981, ten of which resulted in shutdowns.[1] During these shutdowns, many non-essential functions of the government cease. In most cases, the fiscal shortfall was resolved within a few days. Some impasses, like the December 1982 episode, lasted merely a weekend. However, four shutdowns lasted at least one week. How did stocks fare during these prolonged episodes? The US market ended higher at the conclusion of three and was flat in the other. 

So, while a shutdown may be a nuisance[2], history suggests it’s probably not cause for concern in your portfolio.

Funding gap and shutdown dates sourced from US House of Representatives: History, Art & Archives.

Highlighted rows indicate funding gaps that resulted in a shutdown.

Past performance is no guarantee of future results.  
In USD. Data presented in the growth of $1 chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment. Data provided by Fama/French. The Fama/French index represents academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. See “Index Descriptions” for descriptions of the Fama/French index data.

Index Descriptions

Fama/French US Total Market Index: Fama/French Total US Market Research Factor + One-Month US Treasury Bills. Source: Kenneth R. French - Data Library (dartmouth.edu). 

Disclosures

All expressions of opinion are subject to change. This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions. Diversification neither assures a profit nor guarantees against loss in a declining market. 

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.  

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[1] The appropriations process through which the federal government budget is allocated became

stricter about shutting down government operations in the event of a funding gap after legal opinions

issued in 1980 and 1981.

[2] Especially for those with travel plans, since the impacted services may include the TSA.