Thoughts on the Market — The Stakes of Another Government Shutdown

Host: Michael Zezas, Deputy Head of Global Research, Morgan Stanley
Date: January 28, 2026

Episode Overview

In this episode, Michael Zezas examines the looming risk of a short-term US Government shutdown, what might trigger it, and what it means for investors. He contextualizes shutdown risks within the broader landscape of current policy catalysts, details possible scenarios for investors, and evaluates the real market and political implications.

Key Discussion Points & Insights

1. Government Shutdown: Context and Triggers

• Recent weeks have presented investors with global policy risks (e.g., "military action in Venezuela," "potential military action in Iran," "risks of fracturing of the US Europe relationship over Greenland") [00:22].
• Compared to these, a US government shutdown may "seem rather quaint" but is still a risk that should be managed proactively [00:44].
• The shutdown risk stems from ongoing Senate funding negotiations:
  • Democrats are demanding "tighter rules and more oversight on how immigration enforcement is carried out."
  • Republicans are signaling "some openness to negotiations" given recent events [01:00-01:17].
• Time constraints present a challenge: with the House out of session until early next week, "any Senate changes this week could lead to a lapse in funding," making a "brief shutdown this weekend...very plausible" [01:20-01:35].
  • Zezas clarifies this is more about lack of time and unified strategy than any side desiring a shutdown.

2. Economic Impact: Modest and Manageable

• The central case: "The economic impact would be manageable" based on historical precedent [01:42].
• Shutdowns "create meaningful hardship for affected workers and contractors," yet "aggregate macro effects tend to be modest and reversible" [01:47].
• "Most spending is eventually made up, and disruptions to growth typically unwind quickly once funding is restored" [01:54].
• Rule of thumb: "A full shutdown trims roughly one tenth of a percentage point from the annualized quarterly GDP for each week it lasts" [02:00].
  • With only a partial shutdown likely, "that figure would be even smaller."

3. Market Impact: Likely Limited

• Shutdowns “tend not to reprice the fundamental path of earnings, inflation or the Fed" [02:15].
• The market’s response: “the market’s inclination will likely be to look past the noise and focus on more substantive catalysts ahead” [02:22].

4. Political Implications: Not as Market-Relevant as They Appear

• Shutdown risk partly arises from actions that “have contributed to sagging approval ratings for the president and Republicans," prompting investor curiosity about election fallout [02:30].
• Zezas argues “it’s too early to draw any confident conclusions” about midterm impacts, and even then, “we’re not sure it matters” for markets [02:43].
  • Most market-relevant policies (“trade regulation, industrial strategy, reshoring, and increasingly AI”) are “executed through executive authority, not congressional action,” meaning they're insulated from congressional shifts [02:50].
  • Any reversal of “last year’s tax bill,” which incentivized corporate capex, is unlikely as “the President would almost certainly veto” such efforts [03:08].

5. Takeaway for Investors

• "A short calendar-driven shutdown is a risk worth monitoring, but not one to overreact to" [03:23].

Notable Quotes & Memorable Moments

• On context and risk management:

  "By comparison, a potential US Government shutdown may seem rather quaint, but a good investor aggressively manages all risks."
  — Michael Zezas [00:41]

• On the likely impact:

  "Our base case is that the economic impact would be manageable...the aggregate macro effects tend to be modest and reversible."
  — Michael Zezas [01:42-01:50]

• On the broader market reaction:

  "Shutdowns tend not to reprice the fundamental path of earnings, inflation or the Fed, which are still dominant drivers of asset performance."
  — Michael Zezas [02:16]

• On the political angle:

  "We think it's too early to draw any confident conclusions about this, but even if we could, we're not sure it matters."
  — Michael Zezas [02:43]

• On the key investor takeaway:

  "A short calendar-driven shutdown is a risk worth monitoring, but not one to overreact to."
  — Michael Zezas [03:23]

Timestamps for Important Segments

• 00:22 – 01:17: Overview of current policy risks; specifics of government funding negotiations
• 01:20 – 01:35: Why a shutdown is likely a calendar issue, not political brinkmanship
• 01:42 – 02:08: Historical impact of shutdowns on the economy
• 02:15 – 02:22: Explanation of why markets tend to not react sharply to shutdowns
• 02:30 – 03:16: Political implications and why they may not matter for markets
• 03:23: Investor bottom line and practical advice

Conclusion

Michael Zezas provides a succinct yet nuanced blueprint for understanding the imminent US government shutdown risk. He reassures investors that:

• A short shutdown is plausible but not likely to inflict major market damage.
• The economic effects, while real for individuals, are historically mild at the macro level.
• The markets and core policy trajectories are more influenced by other, larger catalysts.
• Political fallout, while relevant, likely won’t change the overall direction of critical market-shaping policies.

For investors: Keep monitoring headlines, but don’t let the noise of a short-term shutdown distract from deeper, more lasting market drivers.