With only one week left until the U.S. federal government runs out of funds, the government faces a shutdown unless Congress passes a temporary spending bill known as a "Continuing Resolution" (CR) by midnight on March 14.Although House Republicans have proposed a bill to fund the government until September 30, Trump has urged all Republicans to vote in favor on Truth Social, claiming it is a "very good" appropriations bill in the "current situation." However, it remains uncertain whether the bill can be passed by both the House and Senate and signed by the President before the end of next week. There are many independently operating lawmakers within Congress, and agreements could break down at any time due to personal opinions or political positions.What does a government shutdown mean for investors? According to an analysis by Barron's, market volatility may increase in the short term. However, based on past stock market performance during government shutdowns, investors need not panic excessively.Of course, this time may be different: the government shutdown occurs against a backdrop of concerns over trade conflicts that have already stirred the stock market. So far this year, the S&P 500 index has fallen nearly 2%, and the Nasdaq index has dropped about 6%. The Chicago Board Options Exchange Volatility Index (VIX) has risen nearly 35% this year, reaching around 23, indicating that panic on Wall Street is intensifying.Internal Party Divisions and the Democratic Stance: Proposal Faces ChallengesCurrently, Republican leaders in both the House and Senate have expressed a desire to extend the current appropriations bill until the end of the fiscal year, September 30. President Trump, House Speaker Mike Johnson, and Senate Majority Leader John Thune all support this plan, believing it is the best way to avoid a government shutdown and quickly shift focus to the new President's agenda. According to The Wall Street Journal, compared to the fiscal year 2024, this proposal would reduce discretionary defense spending by $13 billion while increasing defense spending by about $6 billion.Despite the Republican leadership pushing for this plan, there are many independently operating lawmakers within Congress, and agreements could break down at any time due to personal opinions or political positions. In the House, Republicans hold a slim majority of 218 to 214, meaning the proposal can afford to lose at most one Republican vote.However, Democrats have stated that if Republicans do not negotiate with them, they will not help keep the government running as they have in the past. They have fiercely criticized the proposal, arguing that it gives Trump too much power. Democratic Senator Patty Murray also stated that the proposal would grant Trump and Musk financial powers typically reserved for Congress. She believes Congress should pass a short-term measure to prevent a government shutdown and complete a bipartisan appropriations bill to "ensure our constituents have a say in how federal funds are used."Senate Democratic Leader Chuck Schumer pointed out that the Republican Party, which controls all departments of the government, has the responsibility to fund the government, and that the Republicans have not negotiated with them on the plan:"We believe, and have always believed, that the only solution is a bipartisan solution."Impact of the Shutdown: GDP May Be Damaged, Economic Data DelayedA government shutdown will force most federal employees to stop working and halt their paychecks. While core services such as border protection, air traffic control, power grid maintenance, as well as Social Security and Medicare will continue, national parks will close, environmental and food safety inspections will be suspended, researchers at the National Institutes of Health (NIH) will be unable to accept new patients, and tax assistance services from the Internal Revenue Service (IRS) may also be interrupted.According to research by Bloomberg, the economic consequences of a prolonged shutdown will be immediate but largely reversible. A month-long government shutdown could reduce GDP growth by 0.4 percentage points in the first quarter, but a rebound is expected once normal spending resumes. Although federal workers may be forced to take leave, the unemployment rate in March will not be affected, but if the impasse continues, the unemployment rate in April could rise by 0.5 percentage points. Inflation will see a temporary increase as the output of furloughed federal workers will not be counted, even though they will ultimately be compensated.Additionally, the shutdown will delay key economic reports, such as the Consumer Price Index (CPI), unemployment rate, and retail sales data. About 850,000 federal agency employees may be forced to take leave.Bloomberg summarized:"In normal times, avoiding a shutdown would be a high priority—but now, amid a series of striking measures taken during Trump's early presidency, this is just one of many competing priorities. It remains unclear whether both sides can find common ground."Previously, when one party controlled the White House, the House of Representatives, and the Senate, the government has only shut down twice—both during Trump's first term. Whether a third such event can be avoided will depend on how both sides assess the tactical risks of bringing government operations to a halt.Historical Experience: Short-term Disruption, Limited Long-term ImpactWhat does a government shutdown mean for investors? According to an analysis by Barron's, in the short term, market volatility may increase. However, based on the stock market's performance during past government shutdowns, investors need not panic excessively.Data from the investment research team at Carson Group shows that since 1976, the S&P 500 has performed steadily during the past 22 government shutdowns. More importantly, the market has averaged a 12.7% increase within 12 months after the shutdown ends.While past shutdowns have varied in duration, including a 1-day shutdown at the end of President Jimmy Carter's term and eight shutdowns of less than five days during President Ronald Reagan's term, even longer shutdowns did not trigger panic among investors.For example, during President Trump's first term, from December 2018 to January 2019, the government shutdown lasted for more than a month, yet the S&P 500 index rose by more than 10%. Similarly, during President Obama's second term, the government was shut down for 16 days in 2013, and the S&P 500 index rose by over 3%.Ryan Detrick, Chief Market Strategist at Carson Group, stated:"Despite the turmoil in Washington this year and the shadow of a government shutdown, the good news is that the stock market often tends to overlook the impact of shutdowns. Investors have many concerns, but the impact of a government shutdown on the stock market should not be one of them."Internal and External Troubles: Trade War Combined with Shutdown Risks, Market Panic SpreadsOf course, this time the situation may be different: the government shutdown occurs against the backdrop of trade conflict concerns that have already stirred the stock market. So far this year, the S&P 500 index has fallen nearly 2%, and the Nasdaq index has dropped about 6%. The Chicago Board Options Exchange Volatility Index (VIX) has risen nearly 35% this year, reaching around 23, indicating that panic on Wall Street is intensifying.Jay Woods, Chief Global Strategist at Freedom Capital Markets, pointed out in a report:"Markets often decline ahead of deadlines and then rebound depending on whether a temporary shutdown occurs. Therefore, pay attention to the rising rhetoric this week as political posturing becomes louder. Budget disputes, proposed spending, and of course, optical dynamics will take center stage and may begin to cause temporary anxiety in the market."Investors are concerned that tariffs may further exacerbate inflationary pressures. Recent economic reports have also indicated that the manufacturing and labor markets are weakening, raising concerns about stagflation.Nevertheless, investors may once again realize that rather than focusing on the noise from Washington, it is better to pay more attention to the factors that typically drive stock prices: earnings growth. Larry Adam, Chief Investment Officer at Raymond James, stated in a report:"While a government shutdown may bring short-term volatility, we expect the economy and corporate fundamentals to remain solid."