Betting markets like Kalshi see the government shutdown lasting 10 days or more. Investors might not like that.

By William Watts

An extended shutdown would begin to undermine consumer and business confidence: strategist

Stock-market investors aren't cowed by the government shutdown.

Who needs a fully functioning federal government? Apparently not stock-market bulls, with major indexes aiming for record finishes Thursday as the shutdown continued for a second day.

But how long can the shutdown run without starting to unnerve investors?

Since the mid-1970s, there have been 50 shutdowns with an average duration of eight days, and average one- and three-month returns have been positive, observed Adam Turnquist, chief technical strategist at LPL Financial, in a Wednesday note (see chart below).

"While the government shutdown introduces a new layer of uncertainty for markets, they have historically been short-lived and, as a result, have had minimal impact on the economy," Turnquist wrote. "Investors have generally looked past budget-related disruptions, prioritizing corporate earnings, broader economic trends, and other key macroeconomic factors."

Prediction markets indicate that bettors expect the shutdown to last 10 days or longer.

-- On Kalshi, a contract that pays off if the shutdown lasts longer than 10 days is trading at 63 cents, indicating a 63% probability. A contract that pays off if it lasts longer than 15 days reflects a 40% chance.

-- On Polymarket, similar contracts reflect a 34% chance the shutdown ends between Oct. 10 and Oct. 14, and a 40% chance it runs beyond Oct. 15.

A shutdown that stretches much beyond the average "will start to significantly impact economic growth and consumer confidence, which isn't flying high to begin with," Art Hogan, chief market strategist at B. Riley Financial, told MarketWatch in an interview.

The Dow Jones Industrial Average DJIA and S&P 500 SPX were up slightly in choppy trading Thursday afternoon, on track to build on record finishes scored on Wednesday. The Nasdaq Composite COMP was up 0.3%, on track for its first record close since Sept. 22.

Stocks have also benefited as investors further priced in the prospect of two more quarter-point rate cuts by the Federal Reserve before year-end. The uncertainty created by the economic data void accompanying the shutdown is seen as making it likely the Fed will want to deliver more easing to insure against a downturn, analysts said.

Fed-funds futures traders have priced in a probability of a quarter-point cut this month at better than 95%, up from around 85% a week ago. The prospect of a further quarter-point cut in December stood at nearly 86%, up from around 60% a week ago, according to the CME FedWatch Tool.

Hogan also observed that the stock market has tended to keep rallying when it has entered a shutdown with a positive tailwind and has done less well when it has started a shutdown on a sour note. As the records attest, the stock market has certainly entered the current shutdown with the wind at its back.

LPL Financial found that the average drawdown during a shutdown has only been minus 1.6%, with the worst drawdown of minus 6.1% occurring when the government shut down in 1979. Looking at the one- and three-month periods following the passage of a budget resolution, the average returns for the S&P 500 were 1.2% and 2.9%, respectively.

And Turnquist noted that even long shutdowns don't necessarily mean trouble. The longest was a 34-day shutdown that ran from Dec. 22, 2018, to Jan. 25, 2019, and it was accompanied by a 10% rally for the S&P 500 because the Fed pivoted from a hawkish monetary-policy stance to a dovish one in January - "a great example of how macro factors matter more to markets than short-term political turmoil," he wrote.

-William Watts

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10-02-25 1446ET