By Ellen Hazen, CFA®, Chief Market Strategist

What We Are Watching in October

• Government shutdown. The federal government shut down on September 30 when Congress was unable to pass a bill to continue funding the government. Democrats, whose votes Republicans need to pass a Continuing Resolution (“CR”) to keep the government open, are currently refusing to vote for a CR unless provisions are made to restore Affordable Care Act subsidies (slated to expire at the end of 2026) and to restore $1 trillion in Medicaid funding. The Kaiser Family Foundation estimates that ACA beneficiaries’ premiums will more than double, from $888 to $1,906, if the subsidies lapse
• Third-quarter GDP will be released October 30 (assuming the government has reopened). Q1 GDP was 2.0% and Q2 was 2.1%, decelerating from the 2.8% achieved in 2024. Currently, the Atlanta Federal Reserve’s GDPNow indicator suggests that Q3 will show acceleration from Q1 and Q2 levels to 3.8%, and economists are estimating full-year GDP of 1.8% for 2025
• Q3 earnings. Earnings for Q3 2025 will begin to be reported the week of October 13. Currently, analysts expect a strong showing, with revenue expected to grow 7.2% (an acceleration from 6.3% in Q2 2025) and earnings expected to grow 12.4% (a deceleration from 12.7% in Q2 2025). We expect that the multi-quarter string of positive earnings surprises will continue. As usual, the fastest growth is anticipated to be in the Technology sector, in which earnings are expected to grow by 20%. Other economically sensitive sectors are also expected to be strong, with Industrials earnings growth of 15% and Financials earnings growth of 9%. It’s no surprise these economically sensitive sectors would be showing strong growth as it’s highly consistent with the Atlanta Fed’s GDPNow forecast of an accelerating economy into the third quarter
• The September nonfarm payrolls, originally scheduled to be reported October 3, has been delayed because of the shutdown. Other data represent some of the same underlying information: ADP reported a loss of 32,000 jobs in September in its private payroll data report on October 1, which does not include government employment. Historically, ADP data has been moderately correlated with official data so this may presage a decline in official nonfarm payrolls as well. New nonfarm payroll job growth has been decelerating all of 2025 and is down sharply from 2024’s average of 168,000. This is partially due to lower labor supply, as immigration has slowed, but may also reflect weaker corporate demand for labor
• Tariff revenue. Tariff revenue collected has leveled off at about $32 billion per month in each of July, August, and September. Annualized, this amounts to $384 bn per year. For context, this is equal to about 14% of personal income tax revenue. It also represents about 19% of the $2 trillion annual fiscal deficit. The reciprocal tariffs are still being collected while they are being challenged in court; if found to be unlawful, some of that money may be owed back to the payers
• Fed meeting Oct 29. The Fed’s next meeting is Oct 28-29. At the September meeting, new governor Stephen Miran was the only dissenter from the 0.25% cut. His presumed dot on the published dot plot for the expected Federal Funds Rate by the end of 2025 in the Summary of Economic Projections was a full 0.75% lower than any other estimates, reflecting his current status as an outlier among Fed members
• Inflation – if we get the data. The Consumer Price Index (CPI) and the Producer Price Index (PPI) are scheduled to be released on October 15-16. Recent inflation indicators show that inflation remains above the Fed’s 2% target, at 2.9% for both CPI and Core PCE in September

Amid the ongoing government shutdown, many clients are asking what impact this might have on the markets and their portfolios. Historically, shutdowns have tended to have limited impact on market performance – and current market behavior seems consistent with this thus far.

Government Shutdowns and Market Response – Background. Government shutdowns have occurred fairly often over the past several decades, with 20 shutdowns since 1970. Half of these shutdowns were brief, limiting the economic impact. The most notable recent shutdown (2018) lasted for 35 days. Typically, the stock market declines slightly before a shutdown and rebounds once it is resolved.

Why do markets take shutdowns in stride?

• Shutdowns don’t typically last that long. Of the 20 shutdowns since 1970, half lasted for fewer than 5 days. A short shutdown has a very small impact on the economy
• Equities are valued on the future cash flows they are expected to generate. These are generally forecasted out many years into the future. A government shutdown today is unlikely to materially change a large company’s cash flow potential. Therefore, the company’s valuation – and hence its equity price – is unlikely to change
• Although the 2018 shutdown is estimated to have reduced GDP by about 0.3% to 0.4%, the equity market was much more volatile. It declined by 12% in the three weeks prior to the shutdown, appreciated by 10% from there to the time it ended, and registered a total decline of 3% over the entire timeframe

The Current Shutdown. Here is some context for the current shutdown:

• Why is it happening? The key sticking point for Democrats is the $1 trillion in ACA subsidies that OBBBA removed. Thus, they are refusing to vote for a Continuing Resolution.
• Size and scope. None of the 12 required appropriations bills have been passed, so this is a full shutdown. The Office of Management and Budget (OMB) has not provided a figure for the number of federal employees furloughed, but estimates are in the 800,000-900,000 range, a substantial percentage of the roughly 2.2 million federal government employees. This could (possibly temporarily) raise the unemployment rate by about 0.4%
• A week before the shutdown, the OMB directed agencies “to consider issuing Reduction in Force (RIF) notices to all employees in programs, projects, or activities” that become unfunded, that do not have another source of funding, and that are not aligned with the President’s priorities. Thus, there is a chance that GDP impact could be greater than that caused by a temporary pause in paychecks. Given that the administration did not need a shutdown to announce or order an RIF, however, this may represent posturing rather than a likely outcome

Current Market Reactions and Evidence. Since the shutdown began, most markets have remained calm:

• Equity markets have performed normally. The S&P 500 Index is up by 0.4%, the Russell 2000 Index is up by 1.6%, and the CBOE Volatility Index (VIX) has remained subdued at under 17
• Fixed Income markets have also performed normally. The 10-year Treasury yield has declined by a mere basis point (0.01%) while corporate credit spreads remain tight. The Treasury Inflation Protected Securities (TIPS) market likewise reflects stability, with yields having increased by 3 basis points (0.03%)
• If the shutdown is perceived to illustrate accelerating congressional dysfunction, we might see this reflected in appreciation of real assets. Here the evidence is mixed:
  • Gold has been soaring all year and has increased another 2.6% since the shutdown began
  • The US Dollar has remained largely unchanged over this timeframe
  • Oil prices, on the other hand, have declined by 1.1%
  • Bitcoin has been among the strongest performers, appreciating by almost 10% since the beginning of the shutdown

Taking all this evidence into account, we see no clear pattern of market response to the current shutdown. Of course, it has only been a few days. But when markets respond to a perceived crisis, they generally react rapidly – one need only look back to the S&P 500’s 18% decline in response to the tariff announcements in early April to see evidence of this.

The thus-far stable market response highlights that investors are likely focused on many other factors that are currently influencing markets, like the massive AI infrastructure buildout, inflation expectations, economic growth, fiscal deficits and changes in Fed rate policy, currencies, and corporate earnings.

Potential Risks and Economic Impact. Although markets are largely unfazed, some risks could shift the outlook:

• The OMB’s recent directive to consider permanently laying off furloughed government workers could adversely impact both employment and economic growth if implemented
  • Normally, when furloughed employees return to work after the government reopens, they receive back pay. Permanently eliminating even a percentage of the 800,000-900,000 furloughed employees could increase the unemployment rate (even as that could also reduce the deficit). In addition, many government contractors lose work and do not receive back pay. All in, a loss of pay for furloughed employees and /or government contractors could dampen consumer spending in affected regions
• The shutdown is delaying key economic data releases, such as jobs reports and inflation measures, creating uncertainty for investors and policymakers relying on this information. Jobs data has already been delayed, and inflation data currently scheduled for mid-month may be delayed as well
• Numerous nongovernment sources like the ADP’s payroll data and regional Federal Reserve economic reports provide data during this time, so while some data is missing, we can still construct a decent picture of the economy
• Historically, longer shutdowns like those in 2013 (16 days) and 2018 (35 days) cost 0.3% to 0.4% of GDP, according to a Congressional Budget Office study

Summary and Closing Thoughts. In summary, government shutdowns have historically caused limited and short-lived disruptions in the markets. Current market performance is consistent with this observation, likely reflecting broader economic factors as well as investor confidence that this shutdown will not dramatically impact corporate earnings or economic growth. Investors can take comfort in the market’s long history of resilience during government shutdowns, focusing instead on broader economic trends.

Disclosures