They say the US government could shut down if it doesn't pass a budget by September 30. If it actually shuts down, what happens, and how would the stock market be affected? I heard this happened last year too.
2026-09-27
Scenario branches: a 43-day playbook already played out last year
The event today's report briefly mentioned, that "the last fiscal year began with the longest shutdown on record," is the most recent precedent. When budget negotiations for fiscal 2025 (beginning October 1, 2025) failed, the US government shut down for 43 days, and a budget was not passed until November 12, 2025 (compiled from related reports, 2026). Now the budget deadline for the next fiscal year (fiscal 2027, beginning October 1, 2026) is again approaching on September 30.
What last year's shutdown actually produced
Federal employment fell by 162,000 in October and 6,000 in November. The Bureau of Labor Statistics (BLS) canceled the October jobs report outright, and the November release was also delayed (NBC News, 2026). The White House at one point even said the employment and inflation data skipped during this period could be permanently lost (compiled from related reports, 2026). At its October 29 decision, the Fed chose to hold rather than cut, citing the data gap; a majority of policymakers argued that "without data, we should proceed cautiously" (S&P Global, 2026).
Yet the stock market kept setting record highs throughout those 43 days. CNN even published an analysis titled "Why stocks keep hitting record highs in the middle of a government shutdown" (CNN Business, 2026). In fact, during the 21 shutdowns since 1976, the S&P500 posted positive returns 12 times, with an average return of about +2.7-4.4%. Extending the window to 12 months after a shutdown ends, the index was higher 86% of the time, with an average return of +12.7-21% (CNBC/Kiplinger compiled, 2026). It is the market's learned response of treating shutdowns as "political noise."
Why this time could be different
Last year's shutdown came while the Fed was in a "cutting" cycle, so the data gap merely led to a "cautious hold." Now it is the opposite. As today's report noted, the Fed raised rates on September 16 for the first time in three years, and the market has already priced in a 70% probability of another hike in October. If a prolonged shutdown in this environment delays the October jobs report and CPI again, the Fed would be in a trickier position, having to make decisions "without data at the start of a hiking cycle." The data gap could serve as a buffer that delays hawkish decisions, but conversely, if Chair Warsh pushes ahead with a hike on limited information, the debate over policy risk could intensify.
Paths by scenario
| Scenario | Conditions | Outcome |
|---|---|---|
| Early deal (within 1 week) | Dramatic bipartisan agreement | Minimal market impact; existing trends continue |
| Short shutdown (1-2 weeks) | Partial negotiation delays | Only the October jobs report is delayed; the October FOMC may lean toward a hold on that basis |
| Long shutdown (repeat of 43 days) | Repeated political deadlock | October-November jobs reports lost and even CPI delayed; the Fed's decision-making gap extends into December, though past patterns suggest the index itself is likely to hold up |
So what should investors do?
There is little basis for treating the start of a shutdown itself as a sell signal. Most of the past 21 did not put meaningful downward pressure on stocks. But this time there is the special factor of being "at the start of a hiking cycle," so investors should watch both whether the shutdown drags on and whether jobs and inflation data are actually released before the October FOMC. Since bond and dollar volatility could rise the longer the data gap lasts, portfolios heavily weighted toward rate-sensitive assets would do better to use the actual execution of the BLS release calendar as a checklist, rather than the shutdown's end date.
Sources: How the S&P 500 performed after 10 previous government shutdowns, Why stocks keep hitting record highs in the middle of a government shutdown, Government shutdown delays key monthly jobs report at a pivotal moment for the U.S. economy, The 2025 (FY2026) Government Shutdown: Economic Effects, Government shutdown halts release of economic data. The Fed may be 'flying blind' on interest rates