Government Shutdown Stakes Rise. What It Means for the Stock Market.

House Minority Leader Hakeem Jeffries called Office of Management and Budget Director Russell Vought, shown above, “a malignant political hack” after the OMB directed agencies to consider mass layoffs if the government shuts down. (Anna Moneymaker/Getty Images))

Key Points

About This Summary

• The Trump administration is considering permanent cuts to the federal workforce through Reduction in Force notices if a government shutdown occurs.
• Democrats criticize the plan, citing concerns about healthcare cuts affecting millions of Americans and calling it an attempt at intimidation.
• Historically, the stock market has shown indifference to government shutdowns, with the S&P 500 rising more often than falling during past events.

The Trump administration is floating the prospect of permanent cuts to the federal workforce if a government shutdown happens next week. While that would mean big pain for affected workers, investors may not have to worry about stocks falling if it does.

The Office of Management and Budget directed agencies “to use this opportunity to consider Reduction in Force (RIF) notices,” in a letter sent late Wednesday night. That’s a much more severe directive than the temporary furloughs that typically happen during funding lapses.

Democratic leaders, who oppose Republicans’ stopgap funding measure on the grounds that it fails to restore healthcare cuts enacted over the summer that affect millions of Americans, were swift to criticize the plan. “Their goal is to ruin your life and punish hardworking families already struggling with Trump Tariffs and inflation,” House Minority Leader Hakeem Jeffries wrote on X. He also called OMB director Russell Vought “a malignant political hack.”

Senate minority leader Chuck Schumer called the plan an “attempt at intimidation.”

House Speaker Mike Johnson, a Republican from Louisiana, shot back with some barbs of his own Thursday morning. “Democrats are holding the AMERICAN government HOSTAGE—in an attempt to give FREE health care to NONCITIZENS, which was just outlawed by Congress,” he posted on X.

Johnson’s comments refer to cuts enacted in Trump’s tax and spending bill that restrict eligibility for healthcare subsidies to certain immigrants, including those with pending asylum applications, temporary protected status, as well as trafficking victims and refugees.

For all the political saber-rattling, the stock market is largely indifferent to shutdowns, according to an analysis by Stifel previously reported by MarketWatch. In the previous six shutdowns lasting five or more trading days, the S&P 500 actually rose more often than it fell.

“Government shutdowns are political events rather than market events,” Stifel wrote in a note last week. “We believe that investors have become conditioned to tune out the noise from the political drama.”

Analysts at Truist echoed that sentiment. “We expect minimal economic impact, barring a prolonged shutdown,” they wrote in a note Thursday morning.

A government shutdown could start on Oct. 1. After the House passed its own funding bill last week, the measure failed in the Senate by a vote of 44-to-48, with all but one Democrat, Sen. John Fetterman of Pennsylvania, opposing it. At least some Democrats need to support the bill for it to pass since it requires 60 votes and there are only 53 Republicans.

Democrats want any funding bill to restore government subsidies that made the health plans used by some 24 million Americans and that were first established as part of President Barack Obama’s Affordable Care Act lower priced. Without the extension, monthly premiums could nearly double, according to a KFF analysis.

Republicans have argued that discussions on extending healthcare subsidies should not be tied to the funding bill.

Write to Anita Hamilton at anita.hamilton@barrons.com