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Stocks closed at record highs Wednesday despite a expected to idle hundreds of thousands of workers and hobble federal agencies charged with dispensing a range of critical services. So why do investors seem unfazed?
Although shutdowns have serious, real-world consequences for millions of Americans, data shows they tend to have a modest impact on financial markets and the broader economy, especially if the closure is brief.
"Most of the economic activity is delayed and usually gets made up shortly after a shutdown ends," Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, told Autos News. "So I can't imagine this will be anything terribly disruptive for the equity markets."
Over the previous 22 shutdowns the U.S. has seen since 1976, the S&P 500 rose during some of the closures while falling at other times. Overall, the stock index gained an average of 0.3% during the episodes, according to an analysis from Carson Group (see chart).
What's more, the stock index jumped 13% on average in the 12 months following the shutdowns, the asset management firm found.
"Government shutdowns are inconvenient and messy, but there is little evidence that they have a significant impact on the economy," said Scott Helfstein, head of investment strategy at investment firm Global X, in a report.
During the longest shutdown in U.S. history, which started in December 2018 and extended into January of the following year, some 800,000 federal workers were furloughed or worked without pay. That put many employees under severe financial pressure, driving and others to launch online fundraising campaigns.
Yet for the $30 trillion U.S. economy as a whole, that lost income amounted to a drop in the bucket, noted Thomas Ryan, North America economist at investment advisory firm Capital Economics. Consumption across the U.S. dipped for the two months the government remained partially shuttered, but quickly recovered.
With Wall Street shrugging off the headlines on Wednesday, the S&P 500 closed up 0.3%, topping the all-time high it set last week. The blue-chip Dow Jones Industrial Average also finished in record territory.
The caveat? History is a guide — not a guarantee that events will follow the same script. The political dynamics driving the latest meltdown in Congress obviously differ from those that shaped previous eras, making it hard to predict how long the latest shutdown will last. An impasse lasting a month or more would fuel market uncertainty and could shake investor confidence, according to Wall Street analysts.
"Right now uncertainty is picking up again with new tariffs announced last week, and this just adds to it, which can paralyze growth for the foreseeable future," economist Daniel Altman and author of newsletter High Yield Economics, told Autos News. "It makes it harder for stocks to continue rising if nobody knows what the fiscal picture is going to be like for the next year."
If the shutdown drags on, companies could also press pause on making investment and hiring decisions, which would weigh on stock prices, Altman said.
The latest closure will have another immediate impact that could fray investor nerves — halting the flow of economic reports that experts use to assess everything from the rate of inflation to the pace of job growth. Without critical data, investors could start to feel like they are "flying blind," Vital Knowledge market analyst Adam Crisafulli said in a report.
