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As expected, the government shutdown started at midnight. The market appears unconcerned. At the open, they gave back less today than yesterday’s gains. The history of shutdowns is not scary. The average shutdown is only 8 days. 86% of the time, stocks are higher a year later, with an average gain of 13%. In the latest shutdown in 2018, which lasted 35 days, the S&P rallied 11% during the shutdown. The Fed is typically dovish when no economic data is released during shutdowns, suggesting the market is unconcerned for a reason.
But this time, there are elements at play that might make it different. First of all, stocks are at all-time highs, and at the high end of the range of valuation. The Trump administration has been trying to execute big government payroll cuts that have been challenged, and this will permit unfettered layoffs, which Trump has said may be permanent.
A big cut in government jobs will extend the weakness we’re seeing in private payrolls, not to mention the reduction in illegal alien workers. On the flip side, this is likely to push the Fed off the fence for a series of rate cuts. It will also do little to change the AI narrative, the key driver of new market highs.
The bond market certainly took notice of the payroll data. The US 10-year is down 5 bps to 4.09%. The 2-year is down 6 bps to 3.54%. Bets for Fed cuts jumped. An October cut is a done deal (though bets for a 50 bps are nil). A second cut in December is now an 83% bet. A third cut in January is now 43%, and a fourth in March has risen to 20%. After that, it is likely that Powell will be replaced with a more dovish head of the Fed.
The month of September returns were strong: The S&P was up 4.5%, the NASDAQ +7.5%, the Dow +2.5%, and the Russell 2000 +4.5%. The Magnificent 7 +10.6%. The even-weighted S&P +1.6%. The strongest sectors were, to no surprise, tech +7.4% and communication services +6.3%, followed by utilities and consumer discretionary, both +3.4%. But there were several losers too: Consumer staples -3.0%, basic materials -2.9%, and energy -1.2%, followed by financial services and real estate modestly in the red.
After three hours of trading post shutdown, markets are essentially flat, but NVIDIA has hit a new high, leading semiconductors, which are now up +0.9%. The hopeful dip buyers are going to have to wait. Momentum remains positive.