Since 1976, there have been 20 partial shutdowns with an average duration of one week, although the longest lasted 35 days. Throughout history, only four of these shutdowns extended beyond a single business day. The most recent was the 35-day standoff between late 2018 and early 2019—the longest shutdown in U.S. history—which occurred during President Trump’s first term. A new actual shutdown will now be added to that list as of October 1. What do investors need to know about this shutdown?
First, that shutdowns are not uncommon; and second, historically, Treasury bonds have served as a safe-haven asset during these periods—though it will be interesting to see if that remains the case given the recent challenges observed.
“The S&P 500 has shown little movement during shutdowns, but stocks and bonds typically fall before shutdowns and rebound once they begin, as expectations of a resolution increase. Prolonged shutdowns, like the 35-day one in 2018–19, can affect GDP and unemployment, although these effects tend to reverse once the crisis ends,” says Benoit Anne, Senior Managing Director and Head of the Market Intelligence Group at MFS Investment Management.
A Limited Impact
According to experts, the market impact is minimal. “As investors, we now find ourselves at a point where we must deal more regularly with the flow of news coming from Capitol Hill. Fortunately, the economic and market impact of shutdowns has always been limited. We expect the same to happen this time,” notes AllianceBernstein.
However, a limited impact does not mean no impact. As AllianceBernstein explains in its latest report, during the longest recorded shutdown—the partial shutdown of 2018—the cost reached approximately 11 billion dollars in GDP. Still, the Congressional Budget Office estimates that once payments resumed, only 3 billion were permanently lost. That amounted to around 0.02% of 2019 GDP, meaning the lasting economic impact was more moderate.
“Compared to the risks of hitting the debt ceiling, a shutdown is notably less severe. That said, consumer confidence has already been under pressure, and a prolonged shutdown could pose additional risks to consumer sentiment. This time, although some services and departments would continue to operate, many will pause unless alternative sources of funding are found. Most importantly for the economy: millions of federal civilian employees and active-duty troops will not be paid during the stalemate. Some are paid weekly, others biweekly—an important consideration if the deadlock lasts more than a few days,” the firm explains.
However, for the experts at Raymond James, this shutdown is not linked to the debt ceiling:
“Although the media often conflate the two issues, it’s important to understand that a government shutdown is not directly tied to the debt ceiling. In this case, if a shutdown occurs in the coming days, it would not imply a default on U.S. public debt. Remember, the debt ceiling was already raised by 5 trillion dollars (to 41 trillion) as part of the new fiscal law, likely deferring this issue until 2027.”
The Key Issues
According to Kevin Thozet, member of the investment committee at Carmignac, the market’s mild reaction hides the complex economic dynamics beneath the surface, which could add to growing political uncertainty across the Atlantic:
“It’s unlikely that fundamental questions about the state of the U.S. labor market will be answered in the short term. And this is the crucial point in the debate over whether the U.S. economy is going through a temporary slowdown or entering a recession. In addition, the shutdown could lead the U.S. government to prolong the DOGE mission and cut some public spending, although the implementation or even the feasibility of such a plan remains unclear,” Thozet says.
For Luke Bartholomew, Deputy Chief Economist at Aberdeen Investments, routine is what explains why the market has responded calmly to this shutdown:
“After the shutdowns of the past 15 years, there’s now a well-established playbook, especially considering this one is not related to the debt ceiling. The longer the shutdown lasts, the greater the economic drag—it could mean a reduction in growth of around 0.15% per week,” Bartholomew says.
Still, the Aberdeen expert believes the most significant market impact could be the slowdown in the release of crucial labor market data:
“It is very likely that the Fed will cut rates again in October, but given how central the labor market is to its current approach, and the political pressures it faces, this lack of clarity in the data will certainly not make its job easier,” he adds.
Benoit Anne of MFS Investment Management agrees that one major consequence is the suspension of economic data collection by the government, which can leave investors and Federal Reserve policymakers temporarily in the dark:
“Overall, our Market Insights Group does not believe government shutdowns represent a significant market-moving event. However, they can create opportunities for investors to take advantage of short-term market disruptions caused by overreactions and headline-driven risks,” Anne adds.
In this regard, Amar Reganti, fixed-income strategist at Wellington Management, notes that:
“President Trump has alluded to the possibility of firing federal employees during the shutdown and not rehiring them afterward. This would add further downward pressure on the labor market and increase the likelihood that the Federal Reserve cuts official interest rates in its upcoming meetings.”
The Political Dimension
Experts explain that this shutdown has resulted from political disagreements between Republicans and Democrats on issues such as healthcare—but it reflects the country’s increasing political polarization.
In the opinion of Eiko Sievert, public and sovereign sector analyst at Scope Ratings, doubts about the independence and credibility of key institutions have intensified in recent months:
“Overall, this deterioration in governance standards will further increase political polarization in the coming years. The deeper these political divisions become, the greater the risk that key political agreements won’t be reached on time,” Sievert argues.
She believes this also applies to future standoffs over the debt ceiling—especially if the Republican Party loses control of the House of Representatives and/or the Senate following the 2026 midterm elections:
“Despite the 5 trillion dollar increase in the debt ceiling passed as part of the Big Beautiful Bill, it is likely that a new increase will be needed by 2028, given the weak fiscal outlook. We forecast deficits of around 6% of GDP and a rise in national debt to 12% of GDP over the next five years. Our base case remains that a technical default by the U.S. due to political disputes is unlikely, but the risk is rising and would have a significant impact if it materialized,” she concludes.
