Government Shutdown Market Impact Analysis: Morgan Stanley Warns of Holiday Season Equity Pressure

This analysis is based on the CNBC Power Lunch interview [1] with Monica Guerra, Morgan Stanley Wealth Management Head of U.S. Policy, published on November 4, 2025, discussing the market implications of the ongoing government shutdown that began October 1, 2025.

The current government shutdown presents unique market challenges compared to historical precedents. While past shutdowns since 1995 have seen the S&P 500 gain an average of 4.4%, the current standoff extending into the holiday season could create more severe equity pressure than historical averages [1][3]. The shutdown stems from partisan disagreements over healthcare subsidies and executive power, with key sticking points including ACA tax credits and Medicaid cuts [3].

Market conditions differ significantly from previous shutdown periods. Global markets are already experiencing elevated volatility, with Asian and European markets showing significant declines following warnings from major bank CEOs about potential corrections of up to 20% [2]. Additionally, Bitcoin has slipped below $100,000 for the first time since June, indicating broader risk asset weakness [4].

Historical data reveals sector-specific patterns during government shutdowns. Defense and healthcare sectors have consistently outperformed, with defense gaining 5.2% and healthcare 2.3% during shutdowns since 1995, compared to the S&P 500’s 3% average return [3]. However, the current administration’s potential use of the shutdown to reduce federal workforce may have greater economic consequences than past shutdowns [3].

Morgan Stanley economists estimate a 0.05 percentage point GDP reduction per shutdown week, with longer duration causing greater impact [3]. The average shutdown lasts just over one week, but the current standoff’s extension into the holiday season amplifies its economic significance. Two Fed officials have already indicated uncertainty about December rate cuts amid the shutdown uncertainty [2].

The shutdown’s timing coincides with pre-existing market vulnerabilities. Major bank CEOs from Goldman Sachs and Morgan Stanley have predicted corrections of up to 20%, sparking global selloffs [2]. This confluence of factors creates a more precarious environment than typical shutdown scenarios.

• Extended Duration Risk
  : Holiday season extension could pressure equity markets more severely than historical averages [1]
• Economic Consequences
  : Potential federal workforce reduction could have greater impact than past shutdowns [3]
• Market Volatility
  : Already elevated global volatility compounds shutdown-related uncertainty [2]
• Data Delays
  : Shutdown delays key economic reports, increasing reliance on private sector data

• Defensive Sector Positioning
  : Defense and healthcare sectors historically outperform during shutdowns [3]
• Treasury Safe Haven
  : Government bonds typically serve as safe havens during shutdown periods
• Entry Points
  : Market weakness may provide strategic entry opportunities in quality defensive stocks

The shutdown’s impact intensifies with duration. Morgan Stanley’s 0.05 percentage point weekly GDP reduction estimate [3] suggests compounding economic effects. Political resolution tracking remains critical, with healthcare subsidy disagreements as the primary obstacle.

The ongoing government shutdown requires careful portfolio management and sector allocation adjustments. Historical patterns suggest defensive positioning in defense and healthcare sectors [3], while current market conditions demand heightened risk management. Treasury allocations may provide stability during the uncertainty period [1].

Investors should monitor several key indicators: shutdown duration progress, political resolution developments, Fed policy statements, and sector rotation patterns. The combination of shutdown uncertainty with pre-existing market volatility creates a complex environment requiring diversification and close attention to political developments [1][2][3].

Morgan Stanley’s analysis indicates that while shutdowns have historically been manageable for markets, the current scenario’s unique characteristics—including holiday season timing, elevated global volatility, and potential workforce reduction—warrant increased caution and strategic positioning adjustments [1][3].