How Would a Shutdown Affect the Markets?

As of next Tuesday, October 1^st, the federal government of the United States will cease to be funded, unless the Congress and the White House can come up with a plan to keep it going. Political considerations aside, a federal government shutdown could have serious repercussions on the markets as well, and investors ought to be prepared for the outcome. 

Or would it be as serious as all that? We’ve lived through government shutdowns before, back in the mid-1990s. S&P Capital IQ has dug up the S&P 500’s performance during those two shutdowns, and the impact doesn’t appear to have been strong. During the first one, from December 13, 1995, to January 10, 1996, the S&P dropped by 3.7 percent. But during the second one, from January 10, 1996, to February 12, 1996, the S&P rose by 10.6 percent. 

So there is no predictable consistent effect on stock prices. It appears as though investors know a shutdown will be a temporary issue, and simply go on about their normal business.