The Government Shutdown is here and the Stock Market does not care.

There are times when D.C. Politics can feel like a t.v. soap opera. The Drama. The various plot twists. Politicians on both sides engaging in embellishing facts or spewing “Fake News!” Theatrics at its Finest! This moment seems like one of those times. On Wednesday morning at 12:01 am, the government shutdown operations for the first time since December 2018. House/Senate Republicans and Democrats are at odds with each other over various issues like Free Healthcare for illegal immigrants, Climate Change & DEI to name a few. The Democrats want an additional $1.5 Trillion in funding to reinstate the programs mentioned. The Republicans are not budging because this is supposed to be a simple funding bill to keep the government up and running and not to amend the previously passed “Big Beautiful Bill.” So with all this friction and uncertainty between the two parties, surely there is concern of a major disruption in trading markets. Right? Absolutely Not!

On Wednesday, just hours after the shutdown started, the 3 major averages (Dow Jones, Nasdaq, & S&P500) ended the day higher and set new record highs.

• The S&P 500 rose 0.3% to close at a record high of 6,711.

• The Dow Jones rose 0.1% to close at a record high of 46,411.

• The Nasdaq rose 0.4% to close at 22,755.

For those who can remember the 35 day government shutdown of 2018, this is not a shock. To many people’s surprise at the time, markets reacted well during the month-long shutdown 7 years ago.

The 2018-2019 Shutdown Rally Was Unique:

The stock market's surge of over 10% during the 2018–2019 shutdown was mostly a result of the Federal Reserve's policy pivot. Stocks had been in a severe slump (a near-bear market) in late 2018. When the Fed signaled during the shutdown that they would pause interest rate hikes, it instantly boosted investor confidence and triggered a massive rebound. The market was responding to monetary policy, not the political gridlock coming out of Capitol Hill.

Now let’s take time to draw the comparison to back then and now. There are similarities. Right now, similar to 2018, we have a dovish Federal Reserve. The labor market is beginning to show signs of deterioration and Jerome Powell knows he is behind the curve on rate cuts. The U.S. economy has had almost 2 million jobs counted over the last 3 years that did not exist. That is a problem because that means that rates should have been reduced months earlier. In a way, a government shutdown will increase the probability of more cuts because of the potential for government job losses. This is music to the market’s ears. From a market perspective, this is D.C. noise. Market experts know that at some point, this will be resolved. This is simply postering by both sides. What markets care about most are the easing policy stance from the Fed.

Although there is a history of markets performing well during a government shutdown, the opposite side needs to be considered. There are concerns in regards to the release of key monthly data. A long shutdown may pose a significant problem for markets.

The most critical reports expected to be delayed:

All of these reports are important in helping Jerome Powell shape monetary policy for The Fed. (CPI) & (PPI) tell the inflation story. Weekly Unemployment Claims and the Jobs Report paint a picture on how the economy is doing and if we are barrelling towards a recession.

U.S. Treasurer Scott Bessent expressed concerns that an extended shutdown could lead to a noticeable hit on economic growth. Bessent specifically referred to:

• Direct Impact on Q4 GDP

  • 0.1% to 0.2% shaved of Real GDP for every week shutdown continues in 4th quarter

• Delayed Data

  • Economic Data Blindspot for policymakers, businesses and investors.

  • Difficult to make policy and business decisions.

• Global Perception

  • Perception of U.S. stability

  • Signal of U.S. dysfunction

  • Decline of International Investor confidence

So as of Thursday morning with the risk mentioned above, what do markets think about this second day of D.C. in-fighting?

ALL-TIME HIGHS

The stock market continues to chug along and ignore the drama. Could this momentum change? Of course. A two month shutdown would cause uncertainty because the economy would be a car driving with no breaks. Investors and policymakers would not know where they stand in regards to inflation and economic data. However, as with 2018, D.C. has a habit of magically coming to a resolution before things turn really bad. All soap operas eventually come to an end. The question with this shutdown is before how long?