Key Takeaways:
US government shutdowns occur when Congress does not pass bills to continue funding government agencies. Shutdowns have varied in duration and impact since 1974. Financial markets react with a temporary “risk-off” response.

What Happens in a Government Shutdown?
US government shutdowns occur if Congress fails to pass bills to fund federal agencies, leading to temporary worker furloughs. The current shutdown is due to disagreements over extending Affordable Care Act tax credits. Shutdowns since 1974 have varied in length and impact on government services and economic activity.

How Have Past Government Shutdowns Affected Markets?
Historically, government shutdowns trigger a risk-off reaction in financial markets. Volatility rises, capital flows slow, stock markets sell off slightly, and US Treasury rates rally. International markets devalue the US dollar due to instability and declining interest rates.

Initial Market Reaction to US Government Shutdown:
Financial markets are reacting as expected to the current shutdown. The CBOE Volatility Index is up over 3%, while the US Dollar Index is down, reflecting uncertainty and lack of faith in the US dollar’s value.

Will the Shutdown Have a Long-Term Impact?
Longer-term effects of the shutdown may include delays in economic data releases and disruptions for companies with government contracts. While past shutdowns have been short-lived, the current political climate could make this shutdown more impactful. Investors should remain disciplined and diversified in their approach to mitigate potential impacts.

Read more at Morningstar: What Investors Need to Know About a US Government Shutdown