By Paul R. La Monica

Wall Street is trying to navigate through choppy seas. The source of the storm? Washington, D.C.

President Donald Trump's tariffs -- and threats of more coming -- have created massive amounts of uncertainty, leading to intense volatility for the stock market. And even though many hope the trade war won't last long or be that severe, there are now concerns that turmoil in the nation's capital could lead to something else for investors to worry about: a government shutdown.

Unless Congress passes a stopgap spending bill by midnight on March 14, the government could shut down. That may create even more chaos in Washington at a time when massive job and funding cuts instituted by Trump's and Elon Musk's Department of Government Efficiency, or DOGE, are already raising concerns about their potential negative impact on the economy.

What will that mean for investors? Probably more volatility in the short-term. But the good news, based on what has happened to stocks during prior shutdowns, is that the market tends to get over worries about temporary closures in the government pretty quickly.

According to data from Carson Group's investment research team, the S&P 500 was flat during the previous 22 shutdowns dating back to 1976. And the market went on to post an average gain of 12.7% in the 12 months after a shutdown.

Some of those shutdowns included in the list were fleeting. That includes a one-day shutdown in 1980 toward the end of President Jimmy Carter's only term, as well as eight shutdowns that each lasted less than five days during President Ronald Reagan's two terms.

But even when shutdowns lasted longer -- including one during Trump's first term -- investors didn't panic. The S&P 500 actually rose more than 10% during a more than monthlong shutdown from December 2018 through January 2019.

Likewise, the S&P 500 gained more than 3% during the 16-day shutdown in 2013 during President Barack Obama's second term. And while stocks were flat through a shutdown in December 1995 and January 1996 in the midst of President Bill Clinton's first term, the S&P 500 surged 21% in the year after that shutdown ended.

"Although we've had a lot of drama this year out of Washington and tensions are high as a looming government shutdown could be next, the good news is stocks tend to look past shutdowns," said Ryan Detrick, chief market strategist at Carson Group,

"Investors have a lot of worry out there, but the impact of a shutdown on stocks shouldn't be one of them," Detrick added.

Of course, this time could be different: a shutdown would come at a time when stocks have already been roiled by trade war fears. The S&P 500 is down nearly 2% so far this year, while the Nasdaq has fallen about 6%. The Cboe Volatility Index, or VIX, is up nearly 35% this year to about 23 -- a sign that fear is growing on Wall Street.

So at the very least, stocks could get hit in the coming week as negotiations to avoid a shutdown take center stage.

"The market tends to sell off heading into the deadline and then rallies after -- regardless of a temporary shut down or not. So watch for rhetoric to start to heat up this week as political posturing begins to grow louder," said Jay Woods, chief global strategist with Freedom Capital Markets, in a report.

"Budgetary disputes, proposed spending and of course optical dynamics will take center stage and could start to cause temporary angst in the market," Woods added.

Investors are nervous that tariffs could further boost inflation pressures. Several recent economic reports have also suggested that the manufacturing sector and labor market are weakening, raising fears of stagflation -- a stagnant economy coupled with inflation.

Still, investors may once again realize that it makes more sense to tune out the considerable noise in Washington and focus more on what typically drives stock prices: earnings growth.

"While there may be short-term volatility stemming from the shutdown, we expect economic and corporate fundamentals to remain on solid footing," said Larry Adam, chief investment officer of Raymond James in a report.

To that end, earnings for the S&P 500 are expected to increase 11.6% this year and another 14.1% in 2026, according to data from FactSet senior earnings analyst John Butters in a report Friday.

Adam also pointed out that the Federal Reserve could come to the rescue as well. While the Fed is likely to hold interest rates steady again at its next meeting later this month, he is predicting two more rate cuts later this year.

"This should support the market moving higher over the next 12 months," Adam said.

The big question that remains, though, is whether companies start to cut their profit outlooks because of the uncertainty in Washington. If that happens, the Fed may not be able to stop stocks from sliding further.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 08, 2025 10:17 ET (15:17 GMT)

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