Advisor guide: navigating the government shutdown

A standoff between President Trump and congressional Democrats over federal spending has forced a government shutdown, disrupting services and rattling financial markets. With Democrats and Republicans dug in, experts don’t expect the shutdown to reach a fast resolution. 

The last government shutdown started in late 2018 under the first Trump administration and stretched for 35 days — the longest in U.S. history. During that shutdown, which saw only certain agencies shutter as others stayed operational, some 300,000 federal workers were furloughed, according to the Congressional Budget Office.

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After the Senate failed to adopt continuing resolutions on Wednesday morning, senators are expected to return Friday for further negotiations and a potential vote. 

House Speaker Mike Johnson told reporters the House will reconvene next week, after canceling votes this week to pressure Democrats into accepting Republicans’ government funding plan.

In the meantime, here’s what financial advisors should know.

Markets are volatile, but not necessarily bearish

History shows that shutdowns often add to market volatility but don’t lead to consistently negative or positive outcomes. Of the 21 prior U.S. shutdowns, nine saw market losses from the S&P 500, 11 posted gains and one coincided with a market closure, according to Vanguard.

Michael Arone, managing director and chief investment strategist at State Street Investment Management, said that the early hours of the shutdown have followed the “classic pattern of what you would expect.”

“Stocks are down a little bit. Bond yields are falling. Gold is rising, and the dollar is weaker,” Arone said.

In early trading on Wednesday morning, indexes declined slightly before largely recovering to the previous day’s highs.

“These tend to be short-lived, and the market tends to recover fairly quickly, even before the shutdown kind of officially ends,” he said. “And so I think, from my perspective, it induces a short bout of volatility, but shutdowns don’t normally change the overall direction of markets.”

Shutdowns by themselves have never been enough to derail a healthy economy, but some experts warn that the current shutdown could have more serious impacts when felt in combination with other signs of economic weakness.

While spending and hiring have slowed for much of the year, stock prices have largely continued to rise, and the bond market has not provided its usual cushion during selloffs. A government shutdown adds another shock to the system, and it remains uncertain how well investors could absorb it, wrote Callie Cox, chief market strategist at Ritholtz Wealth Management.

Arone said there’s some truth to that view. With valuations stretched, the potential for downside risk during a shutdown is higher, but he reiterated that the impact is likely to be short-term.

Shutdown strains agencies and workers

The current shutdown suspended the work of hundreds of thousands of employees across the federal government, but the impacts are far from uniform across agencies.

Critical services like Social Security and Medicare will continue to send payments as scheduled. But if the shutdown continues, it could delay Social Security’s annual cost-of-living adjustment (COLA), which adjusts benefits for inflation. The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), scheduled for release in mid-October. However, the Bureau of Labor Statistics, which calculates the figure, is expected to suspend operations during the shutdown.

Due to the shutdown, the BLS will also not be releasing the monthly jobs report on Friday as planned. 

The Internal Revenue Service will continue to operate as normal for the first five business days of the shutdown, thanks to Inflation Reduction Act funds the agency received in August 2022. The agency has not stated if it will stay open after that initial period.

The Securities and Exchange Commission is expected to see a greater impact on its operations due to the shutdown, reducing the agency to roughly 9% of its current staff, according to its August 2025 contingency plan. This drastic cut would significantly limit the agency’s ability to review corporate filings, investigate misconduct and oversee financial markets.

Federal workers — both those continuing to work and those directed to stay home — will not receive a paycheck for the duration of the shutdown, but will receive backpay once a resolution is reached. In the meantime, advisors working with federal employees say it’s essential to prioritize essential expenses to avoid dipping into savings.

“It’ll likely be a couple more weeks until a paycheck is actually missed, and it’s possible this is all resolved before then,” said Andrew Katz-Moses, founder of Katz-Moses Financial in Washington, D.C. “Still, advisors can help put clients at ease by identifying how long their savings will last without pay.”

A pause in pay may not be the only point of concern for federal workers. On Tuesday, President Trump told reporters that his administration may push for a new round of layoffs during the shutdown.

“After the rolling layoffs of this past year, many of my federal employee clients have been revisiting their emergency funds, preparing for job losses that thankfully have mostly spared them so far,” Ethan Miller, founder of Planning for Progress in Washington, D.C. “This means they are mostly prepared for the shutdown, but if the president’s threats are to be believed, this could be the start of another layoff cycle as well.”

Guiding clients through the shutdown

Government shutdowns produce mixed effects on the market, but they consistently weigh on consumer sentiment. During the last shutdown, the University of Michigan’s Index of Consumer Sentiment dropped more than seven points over 35 days, according to an analysis by the CBO.

Experts say confidence crises seen around shutdowns have more to do with what consumers expect than what is actually happening. For advisors talking to clients, it’s crucial to maintain their core messaging during the current shutdown, said Andrew Blake, an associate director in the wealth management practice at Cerulli Associates.

“Many retail investors tend to focus on headlines, which can heighten their anxiety,” Blake said. “Advisors play a crucial role in reassuring clients that their overall financial strategy remains intact. They should proactively emphasize that market volatility is often short-lived and historically tends to stabilize over time.”

“To build trust and reassure clients, advisors should regularly communicate updates and revisit long-term goals, reinforcing the message that temporary market fluctuations do not derail financial plans,” Blake added. “Consistent, calm and informed communication helps clients feel more secure and confident during turbulent periods.”