For investors, government shutdowns are losing their shock value

Last week, Congress edged closer and closer to a government shutdown until it seemed all but inevitable — and then, at the very last minute, pulled a bipartisan rabbit out of a hat and averted the crisis. By any reasonable standard, it was a very dramatic week.

And yet, Wall Street yawned. On Friday, the S&P 500 dropped by 0.27%, the Dow Jones fell by 0.47% and the NASDAQ actually inched up by 0.14%. In a year marked by wobbly stocks anyway, these were hardly signs of unusual stress.

The muted response raises a question: For investors, has the shutdown crisis lost its sting? Many financial advisors say the threat of government collapse has become so routine in U.S. politics that its shock value has worn off. In fact, some said none of their clients even mentioned it last week.

"My clients have not said anything about this shutdown," said Monica Dwyer, vice president of Harvest Financial Advisors in West Chester, Ohio. "I think if this wasn't a regular part of politics, people would be more panicked."

In recent years, government shutdowns — and threats of shutdowns — have been happening with increasing frequency. In fact, last week's crisis was already the second one this year; the first one took place last spring as Congress fought over whether to raise the national debt ceiling. 

It wasn't always this way. In the 1980s, conflicts between President Ronald Reagan and Congress occasionally led to lapses in government funding, but they only lasted a few hours each. Then, in 1995 and 1996, a clash between President Bill Clinton and congressional Republicans led to a dramatic shutdown that lasted 21 days — the longest in history at that point.

After that, there were no shutdowns for 17 years. Then they began happening more often — once under President Barack Obama in 2013, twice under President Donald Trump in 2018 and 2019 and now, less than three years into Joe Biden's presidency, House Republicans have threatened to shutter the government twice in 2023.

The cumulative effect of all these crises, some wealth managers say, is that investors have learned to ignore them.

"Very few clients have even mentioned the potential government shutdown during conversations with me," said Tom Balcom, founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Florida. "They all know that the government shutdown is merely a political stunt and won't have an impact on their portfolios or the stock market."

READ MORE: How to guide clients through a government shutdown

Over the past few decades, that impact has grown smaller. During the 1996 shutdown, according to Investopedia, the S&P 500 stayed almost frozen in place, gaining just 0.1%. In 2019, the index suffered even less, rising by 10.2%.

What would it take for these crises — or would-be crises — to actually spook investors? Some advisors say the political circumstances would need to be very different.

"To take it seriously, we'd have to see a situation where it's not in both parties' best interest to reach an agreement," said Noah Damsky, a principal at Marina Wealth Advisors in Los Angeles. "Neither party benefits from a shutdown. It would be egg on everyone's face, so it makes sense that the standoff ends at the eleventh hour with maximum political posturing."

The fact that investors have grown numb to government dysfunction doesn't speak well of the current state of U.S. politics. But as some wealth managers pointed out, this apathy could also be the result of good advising.

"Clients are always worried, but it's our job to anticipate these concerns and address them in advance," Damsky said. "There will inevitably be a recession, government shutdown, crisis and so on — it's just a matter of timing. Good preparation means they still might be concerned, but stay away from the ledge and derailing the strategy."