Would a government shutdown impact your investments?
The stock market has soared this year, shrugging off a flurry of new tariffs, an uptick of inflation and a sharp slowdown in hiring.
As the federal government hurtles toward a potential government shutdown at 12:01 a.m. on Wednesday, the high-stakes standoff raises a question for investors: Will the good times keep rolling?
Analysts who spoke to ABC News on Tuesday downplayed the risk posed by a short shutdown lasting a matter of days, saying it would do little to derail markets. A longer shutdown spanning weeks or months, however, could cloud the economic outlook and sour investors, leading to a selloff, they added.
"These things usually work out pretty quickly. Investors have come to expect that outcome," Bret Kenwell, an investing analyst at eToro, told ABC News. "A prolonged shutdown is something that could weigh on equities. Nobody dislikes uncertainty more than the markets dislike uncertainty."
Top congressional leaders met with President Donald Trump at the White House on Monday afternoon in a last-ditch effort to avert a government shutdown. But as a stalemate persists, a shutdown seems nearly inevitable barring an unexpected breakthrough.
The potential shutdown is set to arrive at a delicate moment for the nation's economy, as a hiring slowdown stokes recession fears and inflation proves difficult to fully contain. Still, the stock market has demonstrated resilience.
The Dow Jones Industrial Average has climbed 9% so far this year, while the S&P 500 has jumped 13%. The tech-heavy Nasdaq has soared 17%.
Some analysts pointed to a muted response from markets on Tuesday as evidence of investors largely unbothered by the clash in Washington D.C. The three major indexes ticked down slightly, but none suffered losses even approaching a half-percentage point.
"The market is not showing complacency but rather is showing a sense of context based on what has happened in these situations before," John Stoltzfus, managing director and chief investment strategist at Oppenheimer Asset Management, told ABC News.
Typically, lawmakers resolve government shutdowns quickly. Since 1977, the U.S. government has failed to meet a funding deadline on 20 separate occasions, posting an average shutdown length of 8 days, the Bank of America Institute, or BAI, said in a memo on Monday.
However, the most recent shutdown – which took hold in 2018, during Trump's first term – lasted far longer than average, clocking in at 35 days.
If a potential government shutdown were to stretch on for an extended period, the wobbly condition of the nation’s economy could heighten the risk posed to investors, some analysts said.
Federal Reserve Chair Jerome Powell last week said a simultaneous bout of rising inflation and weak hiring presents policymakers with a "challenging situation" as they attempt to steer the economy through a "turbulent period."
A prolonged government shutdown could rattle investors since the uncertain outcome in the Capitol may collide with warning signs in the economy, Callie Cox, chief market strategist at Ritholtz Wealth Management, told clients in a memo on Monday.
"A shutdown would be another shock to absorb, and it's tough to say how well investors will absorb it," Cox wrote. "I'd feel better about the shock absorption if the economy were in a better spot, and this catalyst were a little more defined."
Five out of the 10 shutdowns since 1981 have occurred during S&P 500 pullbacks of 5% or more, Cox noted. But, she added, government shutdowns have "never led to a recession or market crash."
In fact, the S&P 500 rose more than 10% during the 35-day shutdown in 2018, Brian Gardner, chief Washington strategist at wealth management firm Stifel, told ABC News in a statement.
This time around may be different, some analysts said. A prolonged shutdown could trigger a downturn of between 5% and 10%, Kenwell said, adding that the strong performance so far this year had sent some investors in search of “an excuse for a pullback.”
Stoltzfus also described the market as ripe for a drawdown, saying a shutdown could "give bears, skeptics, and nervous investors an opportunity to take profits." He forecasted a decline of between 4% and 6% in the event of a significant government shutdown.
Still, some analysts said a decline would likely prove temporary, creating a buying opportunity for investors on the lookout for shares of high-quality firms at bargain prices.
"We don't think you blindly buy the dip but go for the babies thrown out with the bath water," Stoltzfus said.
