October 2025
Market Commentary
Looking Beyond the Headlines: Understanding the Market Impact of a Government Shutdown
On September 30th, our government failed to pass a funding measure before their midnight deadline, resulting in a government shutdown. While disruptive and unsettling, historically the impact of a shutdown on the economy and markets has been minimal.
A Familiar Story: Shutdowns in Historical Context
History often provides context during uncertain times. Looking back to 1977, there have been 20 government shutdowns. The average duration, 8 days, with little net impact on stock and bond markets. That is not to say that there was no reaction leading up to and after the announced shutdowns, but after the initial response investors refocused their attention on the fundamental drivers of markets – corporate earnings and the economy – to inform their long-term investment decisions.
As we move forward, the duration of the shutdown is key for assessing the economic impact and market reaction. Intuitively, the longer it lasts, the more damage we may see in the short term. Equally important will be to look for what may be different this time from prior shutdowns.
Why This Time May Be Different
Top of mind is quantifying the number of federal employees impacted and the estimated impact to GDP, employment, confidence and consumption. According to the Congressional Budget Office (CBO) 750,000 federal workers, or one third of the federal workforce, are expected to be furloughed, which will result in $400 million a day in lost wages. And Moody’s estimates a negative 0.1% impact to quarterly GDP for each week the government remains shuttered.
In the past, the impact to labor market data has been minimal, with little movement in unemployment data and initial jobless claims. In addition, while consumer confidence has historically been negatively impacted, there has been limited follow through– no material dip in retail sales - and with activity mirroring pay, meaning that consumer spending is typically delayed and not permanently derailed.
But what could be different this time is the idea that workers may be dismissed as opposed to furloughed – job destruction because of the shutdown. This could be a statistically significant hit to the labor market. At a time when the health of the labor market- a cornerstone of our resilient economy – is being scrutinized by the Federal Reserve and a pivotal component of the Fed’ s dual mandate.
Further complications to be aware of are the availability of economic data. Shuttering the government impacts data collection, processing and dissemination at the Bureau of Labor Statistics, Bureau of Economic Analysis & Census Bureau. Denying key inputs to the Federal Reserve, which has been openly “data dependent” when assessing each rate decision, may complicate discussions and force private sector employment and inflation data to fill in the blanks when the Fed meets later this month.
These developments create greater uncertainty. As that translates to our portfolio decisions, we are keenly aware that in the short term, there is a heightened risk and odds of a burst of volatility but are not making any changes to our long-term strategic allocations.
Investor Takeaways: Focus on the Long Term
Instead, we want to remind our clients that portfolio construction and diversification remain the best defense during volatile times. In recent memory, investors have gravitated to high quality companies, treasury bonds and alternatives such as precious metals – especially gold – when government shutdowns have occurred. All three are foundational elements of our portfolios, already in place to help mitigate any near-term negative reactions from markets.
We’re here for you
As always, your Cape Cod 5 team of advisors is here to help guide you through uncertainty. If you have any questions, please reach out to us.
These facts and opinions are provided by the Cape Cod 5 Trust and Asset Management Department. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon. Investments are NOT A DEPOSIT, NOT FDIC INSURED, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY, NOT GUARANTEED BY THE FINANCIAL INSTITUTION AND MAY GO DOWN IN VALUE.
