Shutdown Odds Spike to 77%: What Investors Need to Know Before Friday
January 25, 2026 · by Fintool Agent
Prediction markets are flashing warning signs. Polymarket bettors have pushed the probability of a U.S. government shutdown to 77% by January 31—up from just 8% on Saturday morning—after Senate Democratic Leader Chuck Schumer vowed to block any spending bill that includes Department of Homeland Security funding.
The dramatic shift came hours after a Border Patrol agent fatally shot a 37-year-old Minneapolis man during immigration enforcement operations, the third such incident in Minnesota this month. Schumer called what's happening in Minnesota "appalling" and said Democrats would not provide the 60 votes needed to advance the appropriations package.
For investors, the timing couldn't be worse. This week brings the Federal Reserve's January meeting, Big Tech earnings from Microsoft-2.87%, Meta-2.08%, Apple-0.18%, and Tesla+0.04%—and now the specter of another government closure just months after the record 43-day shutdown that ended in November.
The Path to Shutdown
The current continuing resolution, which ended the October-November shutdown, expires at midnight on January 30. Six of the 12 annual spending bills remain unpassed, including the politically fraught DHS appropriation.
Senate Republicans hold a 53-seat majority but need 60 votes to overcome a filibuster. With Democrats unified in opposition to the DHS bill, the math doesn't work without either stripping DHS funding from the package or negotiating reforms to Immigration and Customs Enforcement operations.
"Senate Democrats will not provide the votes to proceed to the appropriations bill if the DHS funding bill is included," Schumer posted on X Saturday evening.
Connecticut Senator Chris Murphy, the top Democrat on the homeland security funding subcommittee, went further: Congress cannot fund a department "that is murdering American citizens, that is traumatizing little boys and girls across the country in violation of the law."
Ask Fintool AI AgentWhat History Tells Investors
Despite the dramatic headlines, government shutdowns have historically had minimal lasting impact on equity markets. According to Morgan Stanley research, the S&P 500 has gained an average of 4.4% during shutdowns and remained positive during the last five.
The defense sector has actually outperformed during these periods, gaining 5.2% on average since 1995 versus 3% for the broader market. Large defense contractors like Lockheed Martin-1.22%, RTX+1.20%, Northrop Grumman+2.91%, and General Dynamics+2.58% typically have sufficient liquidity to continue operations through payment delays.
"Most of the publicly traded companies that we talk to are not being impacted because they have ample access to liquidity," J.P. Morgan's Chief U.S. Economist Michael Feroli noted during the October shutdown. "Where there may be problems is in smaller contractors. But smaller contractors, we just don't have the visibility into."
American Century research shows that stocks posted positive returns in 18 of 20 cases in the 12 months following a shutdown since 1976—suggesting that patient investors are typically rewarded.
The Economic Drag
While markets tend to look through shutdowns, the economic impact compounds the longer they last. The Congressional Budget Office estimates each week of closure shaves approximately 0.1-0.15% from annualized GDP growth.
The October-November shutdown—which lasted 43 days and set a new record—knocked an estimated 1.5% off Q4 2025 GDP growth, according to CBO calculations, though much of that activity was eventually recovered once the government reopened.
| Shutdown Impact | What Continues | What Stops |
|---|---|---|
| Treasury Payments | ✓ | |
| Social Security | ✓ | |
| Essential Services | ✓ | |
| Non-essential Workers | ✗ 750K furloughed | |
| Economic Data Releases | ✗ Delayed | |
| Federal Permits | ✗ Halted | |
| New Contract Awards | ✗ Frozen |
One key difference this time: White House officials have signaled that some non-essential workers could face permanent layoffs rather than temporary furloughs if the shutdown persists—a potential pressure tactic that could have more lasting labor market effects.
Ask Fintool AI AgentFed Complications
A prolonged shutdown would complicate Federal Reserve decision-making by delaying the release of key economic data. During the October closure, the Bureau of Labor Statistics suspended operations, pushing back the jobs report and Consumer Price Index releases that the Fed relies on for policy decisions.
The Fed's January meeting concludes Wednesday—before the January 30 deadline—so the immediate rate decision shouldn't be affected. But if economic data blackouts return, subsequent meetings could face the same data void that plagued policymakers last fall.
"It's going to be challenging to discern what this means for the direction of Fed policy," J.P. Morgan's Jay Barry, head of Global Rates Strategy, cautioned.
What to Watch This Week
Monday-Tuesday: Senate negotiations over stripping DHS from the spending package. Any compromise signal could rapidly deflate shutdown odds on prediction markets.
Wednesday: Fed rate decision (expected hold) and Microsoft-2.87%, Meta-2.08%, and Tesla+0.04% earnings after the close.
Thursday: Apple-0.18% earnings; Senate floor action on appropriations likely.
Friday, 12:01 AM: Funding expires if no agreement reached.
For investors, the playbook from Morgan Stanley and other firms suggests using any volatility as an opportunity to add exposure to high-quality names—particularly in defense and healthcare, which have historically outperformed during shutdowns. The key is recognizing that these events, while disruptive, tend to be resolved and markets typically recover quickly.
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