Government Shutdowns… a Story We’ve Heard Before

Worried about a potential U.S. government shutdown? Learn about the history of shutdowns, what happens during them, and how it might impact the markets. building in Washington, D.C.
3 min read

The potential for a government shutdown has been making headlines, but are they really that big of a deal?  Admittedly, the term sounds dooming and it can, unfortunately, put additional hardships on many federal employees. Historically though, once previous shutdowns were resolved, there typically weren’t any significant, lasting effects  on the economy or the government.  

Right now, there is potential for another partial shutdown on Friday, Dec. 21. Currently, 75% of the U.S. government is funded through September 2019. If Congress and President Trump are unable to pass a funding bill by midnight this Friday, the remaining 25% would shut down.   

What is a Government Shutdown?

At the federal level, a shutdown can happen when disagreement exists among Congress and/or the President regarding a budget for government programs. In the event that Congress and the President fail to agree on a budget, it results in a shutdown until they can resolve the issues and pass funding.

There can be full or partial shutdowns. For example, the potential shutdown approaching on Dec. 21 would be a partial one because appropriations bills have been previously passed to fund 75% of the government through September 2019.  If funding can’t be passed by midnight on Friday, these are the agencies that would be impacted until a budget is approved:

  • Department of Homeland Security 
  • Department of Housing and Urban Development
  • Treasury Department
  • Environmental Protection Agency
  • The Securities and Exchange Commission
  • Department of Commerce
  • Department of State
  • Department of the Interior
  • Department of Transportation

There have technically been 19 U.S. government shutdowns since 1976. However, many of these were not full shutdowns, but rather partial shutdowns or short-term funding gaps that were resolved over the weekend after missing the Friday budget deadline. For example, there was only a 9 hour funding gap earlier this year in February. And in reality, the government has been quite active during every one of them. 

What Happens During a Government Shutdown?

When a shutdown occurs, the government stops providing all but what it refers to as “essential” services. Services that continue during a shutdown include law enforcement, national security operations, the National Weather Service and its parent agencies, medical services at federal facilities, the postal service, armed forces, air traffic management, and corrections (the penal system).

National Parks and other federal tourist destinations like the National Zoo and the Smithsonian are typically closed. 

The Social Security Administration still sends out benefit checks and it also still accepts new applications, although review of some of those applications was delayed  during the last government shutdown. 

In instances where IRS employees were furloughed, there have also been tax refund delays. According to the U.S. Office of Management and Budget, that resulted in about $4 billion in tax refunds being delayed during the last partial shutdown in October 2013. 

In the case of partial shutdowns, the departments that don’t have approved budgets are the ones that will be effected, while it’ll be business as usual—for the most part—at the departments that have funding.

How Have Markets Reacted in the Past? 

“While the headlines can inspire a little fear, this isn’t a time to panic,” said JJ Kinahan, Chief Market Strategist at TD Ameritrade. “There have been government shutdowns and short-term funding gaps in the past and, overall, there has been a minimal impact on the stock market.” One thing to keep in mind is that there’s no way to know how markets will end up reacting. Sometimes stocks have gone up, sometimes they’ve gone down. 

The last partial government shutdown that lasted more than a weekend was in October 2013. By the end of it, the S&P 500 (SPX) was actually up (see chart below). The consumer discretionary sector and defense stocks dropped a little further than the SPX halfway through it, but they were also positive by the time it ended. 

The Bureau of Economic Analysis estimated that October 2013’s 16-day shutdown lowered real GDP by 0.3% in the fourth quarter that year. Consumer confidence also took a big hit in the month that shutdown occurred, although that didn’t seem to impact consumer spending too much as U.S. retail sales still beat expectations during the same timeframe. 

A stock chart showing the S&P 500 performance during two U.S. government shutdowns.


The S&P 500 (SPX) performance during the shutdown in October of 1979 is charted on the left side, and the chart on the right shows the SPX’s performance during the last government shutdown in October 2013. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Instead of panicking and potentially making emotional decisions, Kinahan suggests investors take some time to reassess their portfolio to make sure they’re comfortable with their level of risk, especially if they haven’t done so in a while. And remember that government shutdowns are just one aspect that can impact markets.  

As always, don’t let headlines drive you to make emotional decisions. However, now may be a good time to review your portfolio to ensure you haven’t taken on more risk than you may be comfortable with.

Whether it’s a government shutdown or the latest Fed Meeting, we’ve got the resources to help you break down what’s going on in the markets. Chief Market Strategist JJ Kinahan covers what’s moving markets every morning in the Daily Market Update, while our media affiliate the TD Ameritrade Network brings you the latest market news and shows you how to apply it to your investing and trading strategies. 

The TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation. TD Ameritrade Media Productions Company is not a financial adviser, registered investment advisor, or broker-dealer.

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