Navigating Government Shutdown Risks: Strategic Positioning in Resilient Asset Classes

The U.S. government shutdown that began on October 1, 2025, has reignited debates about its implications for financial markets and economic stability. While short-term volatility is inevitable, historical patterns suggest that markets often rebound swiftly once political impasses resolve. For investors, the key lies in identifying resilient asset classes and sectors that can weather-or even benefit-from such uncertainty.

Historical Market Resilience: Equities Outperform Post-Shutdown

Government shutdowns, though disruptive, have historically had limited long-term effects on equity markets. According to a Morgan Stanley report, the S&P 500 has gained an average of 4.4% during shutdowns since 1995, with positive returns in over half of these events. Notably, the index surged over 10% during the 35-day 2018–2019 shutdown, a record-breaking episode, and rose 3.1% during the 2013 shutdown, according to a Landmark Wealth analysis. These gains underscore the market's tendency to prioritize broader economic fundamentals-such as Federal Reserve policy and corporate earnings-over short-term political noise.

Post-shutdown rebounds are equally compelling. Historical data indicates that the S&P 500 typically strengthens in the months following a resolution, with an average one-month return of 1.2% and three-month return of 2.9%. This resilience is partly due to the swift distribution of back pay to federal workers, which stabilizes consumer spending and labor markets, according to J.P. Morgan.

Sector-Specific Opportunities: Defense and Healthcare Outperform

While equities as a whole have shown resilience, certain sectors have historically outperformed during shutdowns. Defense stocks, for instance, have gained 5.2% on average since 1995, outpacing the S&P 500, Morgan Stanley found. This performance is driven by the sector's reliance on long-term government contracts, which remain unaffected by short-term funding gaps. Similarly, healthcare stocks have advanced 2.3% during shutdowns, though their performance varies depending on the nature of the shutdown (e.g., whether it impacts Medicaid or Medicare funding).

The 2025 shutdown has already created sectoral divergence: government services contractors have surged, while defense manufacturers have remained stable, according to a YCharts analysis. Investors should monitor these trends closely, as sector rotations can offer tactical opportunities amid political uncertainty.

Fixed-Income as a Safe Haven: Treasuries Attract Amid Volatility

Fixed-income markets have historically served as a refuge during government shutdowns. U.S. Treasury bonds have seen prices rise and yields fall during periods of political uncertainty, reflecting their status as a safe-haven asset, Morgan Stanley notes. For example, during the 2025 shutdown, the 10-year Treasury yield fell to 4.164% as investors sought liquidity amid the "data blackout" caused by delayed economic reports - a phenomenon highlighted in a CNBC report.

However, the shutdown's impact on the Federal Reserve's decision-making process adds complexity. With key data like the nonfarm payrolls report delayed, the Fed faces heightened uncertainty about inflation and labor market conditions, as CNBC reported. This ambiguity could prolong bond market volatility, making high-quality Treasuries an attractive hedge for risk-averse investors.

Economic Data Blackout and Policy Uncertainty

The 2025 shutdown has disrupted the release of critical economic indicators, complicating the Fed's ability to respond to emerging trends. As J.P. Morgan stated, the absence of data like the September nonfarm payrolls report has forced investors to rely on private-sector alternatives, such as the ADP employment report, which showed a loss of 32,000 non-government jobs. This "data blackout" increases the risk of reactive policy decisions and could amplify market swings in the short term.

Moreover, the threat of permanent job cuts-unlike previous shutdowns where back pay was guaranteed-introduces a new layer of uncertainty. A reduction in federal workers could dampen consumer spending and labor market stability, potentially extending the economic drag, according to Northern Trust.

Strategic Positioning: Balancing Resilience and Opportunity

For investors, the 2025 shutdown underscores the importance of diversification and sectoral agility. Defensive equities (e.g., healthcare, utilities) and high-quality Treasuries remain attractive during periods of political uncertainty. Meanwhile, sectors tied to government contracts, such as defense, offer potential upside if shutdowns resolve quickly.

Historical precedents suggest that markets tend to normalize once political gridlock ends. However, the prolonged nature of the 2025 shutdown-and the possibility of structural changes like workforce reductions-warrants a cautious approach. Investors should prioritize liquidity and flexibility, positioning portfolios to capitalize on rebounds while mitigating downside risks.