The stock market has enjoyed a remarkable rally since early April when President Donald Trump shifted course, pausing reciprocal tariffs to allow trade negotiations. The move fueled optimism that cooler heads may prevail, lessening the bite of tariffs.

Since the lows on April 8 through Sept 29, the major stock market indexes have surged:

  • S&P 500: 33%
  • Nasdaq Composite: 48%
  • Russell 2000: 38%
  • Dow Jones Industrial Average: 23%

Stock market gains have significantly outperformed the S&P 500’s historical 10% average annual return since the 1950s, despite cracks in the economic armor appearing. Inflation and unemployment have increased since April, prompting concern over stagflation or a looming recession.

So far, solid earnings growth and the belief that stimulus from tax cuts included in the One Big, Beautiful Bill Act (OBBBA) have trumped concerns. However, a possible shutdown in Washington, D.C., on October 1, will again test the rally.

The S&P 500 will face a challenge if the government shuts down on October 1.

Image source: Bloomberg/Getty Images

A government shutdown further pressures the economy

The unemployment rate has risen to 4.3% this year, the highest since 2021, partly because of a surge in government layoffs associated with Elon Musk’s Department of Government Efficiency (DOGE).

What isn’t impacted by the shutdown:

  • Social Security
  • Medicare/Medicaid
  • Interest payments on U.S. debt
  • Postal Service (it’s self-funded)
  • Essential services, including air traffic controllers, military and law enforcement

According to Challenger, Gray, & Christmas, 892,362 people have been laid off in 2025, the most since the Covid pandemic, and up 66% year over year.

A government shutdown in D.C. could similarly pressure the U.S. economy.

Government shutdowns aren’t new, but they remain uncommon. Since 1980, there have been 14 shutdowns, including two “full” shutdowns in 1995 and 2013.

This shutdown leans toward the full version, given that no agencies have received Congressional approval for appropriations yet.

Related: Fed official pours cold water on interest-rate cuts

The Antideficiency Act, first passed in 1870, mandates that government spending occur only when it is authorized by Congress. 

As a result, the currently stalled omnibus legislation containing appropriations means that agencies won’t be able to pay bills, including salaries, until Republicans and Democrats cut a deal.

While most of the government will be impacted, the Defense Department and Homeland Security received funding under the OBBBA that should keep their lights on.

Workers won’t get paid, so they’ll be furloughed unless deemed essential. Essential workers must continue doing their jobs without pay. For example, flight traffic controllers will remain on the job despite the shutdown.

Stocks largely blink but look past prior shutdowns

Helene Meisler is a longtime Wall Street veteran. She was Goldman Sachs’ first technical analyst, and her career kicked off in the early ’80s at Cowen & Company, where legendary technician Justin Mamis mentored her.

In a recent post on TheStreet Pro, Meisler pointed out that stocks’ reaction to the prior full shutdown in 1995 wasn’t overly worrisome:

In 1995, we rallied into the shutdown, which was mid-November. The two months prior saw the market go sideways. While the shut down lasted only a few days, notice that the market did not run away; that happened nearly two months later, in January 1996.

More Economic Analysis:

  • Fed official drops bold 3-word message
  • JP Morgan sends strong recession message on Fed interest-rate cut
  • Fed rate cut could boost your wallet, job, and portfolio

The full shutdown in 2013 caused a retreat ahead of it, but stocks found their footing pretty quickly.

The 2013 period is also interesting because the shutdown occurred in mid October and you can see the market lifted off and never really looked back. But now take a look at what it did heading into the shutdown: it spent the three weeks leading up to it correcting.

The longest-lasting shutdown was 2018’s partial one, which lasted from December 22, 2018, to January 25, 2019. The S&P 500 peaked at 294 in September and retreated 20% through December 24, before rallying 20% through March 2019. In short, it bottomed as the shutdown began.

Stocks tend to disappoint the masses

Ask any active investor, and they’ll tell you the stock market has an uncanny ability to do precisely what most investors think it won’t.

I have a very strong contrarian view… I ask you, how many times did you hear someone say on Monday that the market doesn’t care about a government shut down? I must have heard it at least a dozen times. And that has my contrary juices going.

“What is different today is that there has been no sideways move in the S&P, there has been no correction, there has been a relentless grind upward,” added Meisler.

The expectation that this time will similarly be a “nothing burger” may prove correct. Still, if everyone is expecting an outcome, it’s not beyond the realm of possibility that Mr. Market disappoints.

Of course, investors shouldn’t make long-term decisions based on short-term action, including Washington’s whims. Still, the potential for the market to retreat because of a shutdown shouldn’t be entirely ignored. 

As such, active traders may want to consider locking in some profits in highly speculative stocks with stretched valuations. Given the record-setting move higher in the markets recently, plenty of pre-revenue and pre-profit companies have been bid up to new highs.

Related: Billionaire rings alarm with one-word AI warning