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The US government is once again heading toward a shutdown, with a deeply divided Congress yet to approve any annual appropriations bills or agree on a short-term funding measure ahead of the 1 October deadline. Barring a last-minute deal, around a quarter of federal spending (including discretionary categories like education, transportation, and defense) would be affected, with federal workers furloughed, their pay suspended, and in some cases, potentially fired.

The chances of compromise look slim. President Trump, who will meet with top Democratic and Republican leaders in Congress later today, told Reuters on Sunday he thinks Democrats want to make a deal. House Republicans have passed a continuing resolution to fund the government through mid-November largely along party lines. The main sticking point for Senate Democrats remains the extension of premium tax credits for health insurance, which, if not renewed, could lead to higher premiums for middle-income Americans. Each party expects the other to be blamed by the public, reducing incentives to compromise.

At this stage, US agencies have not submitted updated contingency plans, adding another layer of operational uncertainty. While a US government shutdown would not be a welcome development, we do not see it as a major risk event for investors for several reasons:

Shutdowns have historically had only a muted market impact. Past government shutdowns have typically caused modest and short-lived volatility in equity and bond markets because investors understand that the economic impact is also typically quite modest and very short-lived. For example, during the 2013 shutdown (1-17 October), major indices registered only minor declines and quickly rebounded even before the government reopened. In Trump’s first term, there was more equity market volatility heading into the 35-day shutdown that began on 22 December 2018. But we attribute the volatility more to concerns about Fed rate hikes and trade conflicts. The equity market bottomed out on the third day of the shutdown, and was 10% higher by the time the shutdown ended. Treasury auctions and payments would continue as normal, and while IPO activity and some regulatory processes (such as CFTC positioning data) may pause, we think neither poses a meaningful risk of market dislocation.

Any temporary data delays shouldn’t deter Fed cuts. A shutdown would suspend the collection and release of most government economic data, such as jobs, unemployment, and inflation reports. It would also impact revisions of past labor data, which has taken on more importance recently. However, privately produced data and the Federal Reserve’s own data points and surveys (like the Beige Book) would be unaffected. This does mean the Fed could go into its October policy decision without the benefit of updated labor market data, but we do not see this preventing it from proceeding with a further 25bps rate cut.

Shutdown macroeconomic effects are typically minimal and quickly reversed. Even during extended shutdowns, the broader economy and markets have experienced only limited disruption, with delayed activity typically rebounding once the government reopens. A full shutdown could reduce GDP growth by an estimated 0.1 percentage points per week it is in effect, but this drag should be offset in the subsequent quarters, assuming federal employees receive backpay and spending trends resume. While there is concern that the administration could use a shutdown to justify firing some federal workers as a way to avoid spending appropriated funds, legal and practical constraints mean only a small fraction of the estimated 1.4mn workforce in scope could be affected. Any permanent firings would likely face significant legal challenges and may not be upheld in court.

So, we advise investors to look past shutdown fears and focus on other market drivers, such as the mix of continued Fed rate cuts, strong corporate earnings, and robust AI capex and monetization. We continue to prefer quality fixed income, particularly those with medium-term maturities, which we believe offers a compelling combination of income and resilience in the event of slower growth. Income replacement strategies, such as equity income or yield-generating structured strategies, may also help diversify portfolios. We expect another 75 basis points in rate cuts over the next three meetings, which, alongside solid earnings growth, should support the equity market rally, sending the S&P 500 to 6,800 by June 2026 and possibly as high as 7,500 in a bull case scenario. Given record highs, we suggest investors phase in or use periodic market dips to add exposure.

Gold continues to serve as an effective hedge against episodes of economic, political, and geopolitical risk and would likely perform well if a US government shutdown proves longer or more disruptive than feared. We anticipate bullion reaching USD 3,900/oz by June next year. We wouldn’t expect the US dollar to experience a lasting impact in the event of a US government shutdown. We maintain our view for the USD to weaken over the next 6-12 months and suggest investors consider diversifying exposure toward preferred currencies such as the EUR and AUD.