Government Shutdowns and Market Volatility: A Strategic Investment Opportunity Analysis

Research Report | October 2025

Axum Group of Companies - Investment Research Division

Executive Summary

As the United States faces its first government shutdown in seven years, investors are asking: is this a buying opportunity or a cause for caution? Our historical review suggests buying volatility during shutdowns has consistently offered long-term rewards. 86% of government shutdowns led to positive 12-month stock market returns, averaging 12.7%—well above typical annual performance. However, the unique risks of 2025 demand careful risk management.

Historical Performance Overview

What Happens During a Shutdown?

Since 1981, the S&P 500:

• Rose in 55% of shutdowns

• Averaged only 0.3% return during the shutdown itself

Notable cases:

• Best: +10.3% gain (35-day 2018-2019 shutdown)

• Worst: –3.5% drop (21-day 1995-96 shutdown)

• Most common: Modest volatility and fast recoveries

Post-Shutdown Recovery Patterns

12-Month Outlook:

• 86% of shutdowns led to positive returns a year after

• Average return: 12.7% (vs. 9% long-term average)

• Ranged from 12.6% to 37.9% after recent shutdowns

6-Month Trend:

• Most shutdowns resulted in 8.7%–24.3% gains by six months post-resolution

Examples:

• 2013 shutdown: +19.7% after twelve months

• 2018 shutdown: +26.2% after twelve months

• 1995: +23.2% after twelve months

The 2025 Market Backdrop

What’s Supporting the Market?

• S&P 500: +13% year-to-date

• Nasdaq: +17% year-to-date

• Dow Jones: +9% year-to-date

• VIX volatility index currently below recent average

• Fed expected to cut rates twice more in 2025

• Treasury bonds are having their best year since 2020

Why Be Cautious?

• Labor market is softening

• Inflation remains above target

• Stocks are trading at relatively high valuations

• Political uncertainty (e.g., threats of extending shutdown, data blackout on key economic indicators)

Sector Insights

Opportunities:

• Treasury bonds: Historically see yields fall (median 19 basis points drop) after shutdowns; bonds are gaining now

• Consumer discretionary: Companies with little government exposure usually outperform

• Quality large-cap equities: Less exposed to federal spending cycles

Risks:

• Defense contractors: Usually face selling but often rebound after shutdown ends

• Healthcare: Mixed impact; companies dependent on government payments may see volatility

Currency and International Focus

• The US Dollar usually weakens during shutdowns; a weaker dollar boosts US exporters and firms with international sales

Strategic Investment Approach

How to Seize the Opportunity

• Use initial volatility spikes (often seen in first few days) as buying opportunities

• Target quality companies and defensive sectors

• Keep 5-10% cash on hand for second-wave opportunities

• Reduce position sizes compared with typical buying during less volatile times

Portfolio Templates

Conservative

• 60% Bonds/cash, 35% Blue-chip equities, 5% select opportunities

Moderate

• 40% Bonds/cash, 50% Equities, 10% tactical sector plays

Aggressive

• 20% Bonds/cash, 70% Equities, 10% in targeted sectors (e.g., defense, infrastructure)

Conclusion

Buying market dips around government shutdowns has produced strong long-term returns. In 2025, the opportunity remains—but only for well-managed portfolios balancing risk and reward. Focus on quality, maintain liquidity for new opportunities, and expect some bumps before the rewards arrive.

Disclaimer: This content is for informational purposes and is not investment advice. Past performance does not guarantee future results. All investing involves risk. Consult a professional before making major investment decisions.

About Axum Holdings: Founded in 2012, Axum is a private investment holding company focused on steady cash flow and long-term value through diversified holdings. Learn more at www.axuminc.ca.