US Government Shutdown, Wall Street Remains Resilient

The US government officially entered a shutdown on 1st October after lawmakers were unable to agree on new funding for the fiscal year. While the headlines can sound dramatic, the reality is often more muted. Historically, shutdowns have tended to be temporary disruptions with only modest economic effects, and markets have generally looked through them once funding is restored.

Why Has the Government Shutdown?

The shutdown is a result of a deadlock in Congress, where Republicans and Democrats have been unable to agree on funding priorities for the new fiscal year. In the Senate, a 60% majority is required to pass a budget, meaning bipartisan support is essential. Disagreements over spending levels and program cuts have stalled negotiations.

As a result, some government services are being disrupted, and an estimated 750,000 federal employees are facing temporary furloughs – around 0.5% of the US labour force. While benefit payments, tax collection, and debt servicing continue, the pause in other operations is likely to delay certain public services and distort near-term economic data.

How Have Markets Reacted in the Past?

Looking back, shutdowns have tended to create only modest and temporary economic effects. The most recent episode, between December 2018 and January 2019, lasted five weeks and furloughed roughly 800,000 workers. The estimated hit to GDP was $11 billion, but only $3 billion – about 0.01% of annual output – was considered a permanent loss. Other episodes have followed a similar pattern: while growth can dip in the short term, much of the income is typically restored through back pay once funding is agreed.

From a market perspective, shutdowns have historically been non-events. Equities may sell off slightly during the disruption, but those losses have usually been recovered once operations resume. In fact, in the last six funding lapses, US markets finished higher each time. During the 2018–19 shutdown, markets even rallied by around 10%, helped by the Federal Reserve’s policy easing early in 2019.

The Market’s Initial Response

So far, markets have largely taken the shutdown in stride. US equities, bonds, and the dollar have shown little sign of stress, with investors treating the disruption as political noise rather than a material economic risk. US markets have even pushed higher, setting another record high – a clear signal that confidence in the broader outlook remains intact.

One area showing more movement is gold, which has continued its upwards rally. The commodity appears to be benefiting from a marginal rise in investor unease over US institutional stability and the political backdrop.

How long this calm persists will depend on the length of the shutdown. Each additional day without a funding agreement increases the pressure on lawmakers and raises the chance of more visible disruption. That said, history suggests both sides ultimately have an incentive to reach a deal, and for now markets appear to be betting on a relatively swift resolution.

The Noise

• Equity markets pushed higher across the board this week as US markets extended gains, led once again by technology and the AI-driven rally. Meanwhile, UK equities also performed well, supported by strong results from the banking sector. In Europe, markets closed the week at record highs, lifted by strength in basic resources and financials, with ongoing optimism around AI continuing to underpin sentiment globally.
• Bond markets saw modest moves this week. Long-term bond yields (which move inversely with bond prices) in the US and UK edged slightly lower, mirroring the broader global trend, as expectations in the US for further central bank rate cuts held yields in check.
• Commodities diverged. Crude oil fell 6.8% to its lowest level in four months amid mounting concerns that OPEC+ may agree to increase oil production ahead of their meeting this weekend. Meanwhile, gold rallied 2.5%, leaving it up nearly 50% year-to-date as investors continued to seek safe-haven assets.
• In currencies, the dollar slipped further this week, extending its year-to-date decline to nearly 10% on the Dollar Index (which measures the value of USD against major currencies). While the government shutdown was seen as having little immediate economic impact, it added to wider concerns over policy uncertainty, inflation, and labour market softness. The euro remained firm, gaining against the dollar and trading close to last month’s four-year high, supported by the policy gap between the European Central Bank and the Federal Reserve.