Key takeaways
Congress again averted a government shutdown with the passage of last-minute stopgap funding.
The legislation funds the federal government through September 30, 2025, the end of its fiscal year.
•With the budget issue settled for now, expect Congress to begin debating tax policy and possible spending cuts.
With yet another deadline looming, Congress passed a stopgap spending measure in March that forestalls a government shutdown. While Congress fell short of approving a formal 2025 budget, it funded the government through the fiscal year’s September 30, 2025, end date. This spending package includes a slight increase in defense spending from previous levels and $13 billion in cuts to domestic nondefense spending.
When President Donald Trump signed the measure into law on March 15, it staved off a partial federal government shutdown. Shutdown threats in recent years have become somewhat common, with Congress often struggling to agree to budget terms. With this new measure, Congress is granted some breathing room until it begins work on legislative passage of a new budget for fiscal year 2026.
Congress will soon be required to extend the nation’s debt limit. Doing so allows the U.S. Treasury to continue issuing debt to meet government funding obligations that exceed current tax revenues. Already, the U.S. Department of the Treasury was forced to implement “extraordinary measures” in how it manages obligations to keep the government from defaulting on its debt. However, by summer 2025, these are likely to be exhausted. At that point, a Congressional debt ceiling extension will be required. Some members of Congress have even suggested it may be time to consider legislation that would eliminate Congress’ debt ceiling suspension requirement altogether.
Attention likely shifts now to 2017’s Tax Cuts and Jobs Act, which expires at year’s end. The Republican-led House and Senate are seeking to extend most or all of the tax cuts included in the original bill. However, they must also determine how to offset the negative revenue impact with budget cuts. In addition, President Trump has asked for new tax relief, including eliminating tax on Social Security benefits and on tip income for some workers.
“An additional item that’s been put on the table is eliminating the tax-free status of income from municipal bond debt,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. This is seen as a way to raise revenue that would offset cuts in federal tax rates. However, it would require states and municipalities to offer higher yields in order to attract investors, adding to their expense.
It is expected to be several months before Congress finalizes a tax package. To this point, work on Capitol Hill has been in the background. “Today, markets are focused on Trump administration policies,” says Haworth. In the administration’s opening months, this included the implementation of significant tariffs on foreign imports and the potential for additional tariffs, actions that raise inflationary concerns. It’s also included revamping government agencies and cutting government positions as part of a spending reduction effort.
Haworth notes that other factors such as the economy's strength, inflation, corporate earnings and monetary policy, all still contribute significantly to market performance. However, in early 2025, concerns about potential economic fallout from dramatic Trump administration policy shifts resulted in a volatile stock market.
Budget battles are nothing new in Washington. Since 1980, the federal government has partially shut down on at least 10 different occasions, with shutdowns lasting for extended periods in only three of those cases.
“Today, markets are focused on Trump administration policies,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management.
While federal government spending agreements can be contentious, federal spending declined in recent years after peaking in the immediate wake of COVID’s emergence in 2020. However, current projections indicated higher spending for fiscal 2024 and 2025.
Federal government shutdowns are not a new phenomenon. Since 1980, the federal government has partially shut down on at least 10 different occasions. Between 1980 and 1986, four shutdowns occurred lasting only one day. Three other shutdowns extended just 3-5 days. Since 1995, however, three government shutdowns occurred that lasted much longer.
Date |
Length of Shutdown (in days) |
|---|---|
|
May 1980 |
1 |
|
November 1981 |
1 |
|
October 1984 |
1 |
|
October 1986 |
1 |
|
October 1990 |
3 |
|
November 1995 |
5 |
|
Dec. 1995/Jan. 1996 |
21 |
|
October 2013 |
16 |
|
January 2018 |
3 |
|
Dec. 2018/Jan. 2019 |
35 |
May 1980
1
November 1981
1
October 1984
1
October 1986
1
October 1990
3
November 1995
5
Dec. 1995/Jan. 1996
21
October 2013
16
January 2018
3
Dec. 2018/Jan. 2019
35
Source: United States Congressional Record.
The biggest concern for investors is the risk of an extended government shutdown. “How big a hit a shutdown costs the economy depends on how long the government is closed,” says Beth Ann Bovino, chief economist for U.S. Bank. “One week can be managed as a nuisance, but the longer the government is closed, the more it hurts the economy.”
“The long-term impact of past shutdowns hasn’t tended to be broadly significant for capital markets,” says Haworth. “Even if there is a temporary decline in economic activity, it hasn’t been a major concern for investors.”
Total return of Standard & Poor’s 500
|
Dates of shutdown |
Duration of shutdown |
Total return 3 months prior to shutdown |
Total return during shutdown |
Total return 3 months after resolution of shutdown |
|---|---|---|---|---|
|
12/16/95 to 1/6/96 |
21 |
6.30% |
0.16% |
6.92% |
|
10/1/13 to 10/16/13 |
16 |
5.24% |
1.66% |
7.90% |
|
12/22/18 to 1/25/19 |
35 |
-17.10% |
10.43% |
10.90% |
Dates of shutdown
12/16/95 to 1/6/96
Duration of shutdown
21
Total return 3 months prior to shutdown
6.30%
Total return during shutdown
0.16%
Total return 3 months after resolution of shutdown
6.92%
Dates of shutdown
10/1/13 to 10/16/13
Duration of shutdown
16
Total return 3 months prior to shutdown
5.24%
Total return during shutdown
1.66%
Total return 3 months after resolution of shutdown
7.90%
Dates of shutdown
12/22/18 to 1/25/19
Duration of shutdown
35
Total return 3 months prior to shutdown
-17.10%
Total return during shutdown
10.43%
Total return 3 months after resolution of shutdown
10.90%
Source: U.S. Bank Asset Management Group.
In all three instances of extended shutdowns, markets managed positive performance during and immediately after the shutdown. In two of the three instances (1995 and 2013), markets performed positively in the months leading up to those shutdowns. In 2018, markets were down prior to the shutdown, but other contributing factors may have been at play, including the Federal Reserve’s decision to hike short-term interest rates during that period.
“A variety of issues impact the markets, even during stressful times like government shutdowns,” says Haworth. He also notes that given the frequency of government shutdown threats, the market response tends to be muted. “The market won’t start pricing these in until we actually see a shutdown, and a financial impact from it,” says Haworth.
While political issues such as the debt ceiling dispute, the federal government budget impasse as well as the new administration’s potential major economic initiatives garner significant headlines, it’s important for investors not to allow these issues to distract them from long-term investment objectives.
Talk with a wealth professional to discuss your current portfolio to make sure your assets remain properly positioned to meet your financial goals consistent with your time horizon and risk tolerance.
Government operations are funded by appropriations bills approved by legislative bodies. Those bodies are required to pass budget measures on a regular basis (in the case of the federal government, annually) to provide the needed funding for the government to operate. If policymakers fail to agree to appropriations measures on a timely basis, it can result in a shutdown of government operations. It means, in essence, there is no money available to fund most areas of the government, usually not including essential services like the military or law enforcement. Federal government shutdowns can also occur if Congress fails to extend the U.S. Treasury’s ability to issue debt to cover the government’s bills.
In the case of a federal government shutdown, most of what are considered “non-essential” government functions cease operations. This is because funding is not available to pay employee salaries and cover other expenses of administering functions on a daily basis. What are considered “essential” government services, most related to public safety, such as branches of the military and law enforcement, remain operational. Certain individual government benefits, such as Social Security, Medicare and Supplemental Nutritional Assistance Program benefits, for example, continue to be paid even in a government shutdown.
Since 1980, the federal government has partially shut down on at least 10 different occasions. Between 1980 and 1986, four shutdowns occurred lasting only one day. Three other shutdowns extended just 3-5 days. Since 1995, however, three government shutdowns occurred that lasted much longer. In December 1995 and January 1996, a partial federal government shut down lasted 21 days. In October 2013, a 16-day partial shutdown occurred, and in December 2018 into January 2019, the most recent occurrence, the federal government was partially shutdown for 35 days.
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