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The shutdown starts, but markets don’t flinch
The U.S. government officially shut down last week after lawmakers failed to reach a funding agreement. About 750,000 federal workers are furloughed, nonessential services are paused, and most importantly for markets, critical economic data like jobs and inflation reports are frozen until funding resumes. Think of it as driving at night with the headlights off…the road is still there, but you have to lean forward and focus to try to get a hazy sense of what is around you.
Despite the noise (this is more noise than signal), the economy is entering this shutdown with momentum. GDP growth in Q2 was 3.8% and the Atlanta Fed estimates Q3 GDP growth also at 3.8% (NY Fed estimates 2.35%), powered by resilient consumer spending and record AI investment. Retail sales have accelerated, with same-store sales up 6% in September. Meanwhile, Big Tech is going all-in on AI, with Amazon, Microsoft, Google, and Meta projected to spend nearly $400 billion (!) on capital projects next year. That’s internet-boom-level investment.
The labor market is showing cracks, though. Official jobs data is delayed, so now we get to argue over alternative data sources like ADP and Revelio Public Labor Statistics (more on this later). Job openings have dipped below the number of unemployed workers, but we don’t know whether this has improved or worsened since August. Even as layoffs remain limited, a dearth of openings accomplishes the same frustrating result for those searching. Federal job cuts tied to the shutdown could add pressure if the political standoff drags on.
For the Fed, this blackout complicates policy decisions. With official data offline, weaker private indicators like ADP payrolls may shape the narrative heading into the Oct. 29 meeting. After resuming rate cuts in September, the Fed is still likely to ease further, aiming to bring rates toward 3%–3.5% over time. But without hard data, officials are effectively driving blind.
Markets, however, barely blinked. The S&P 500 gained nearly 8% in Q3, with the Nasdaq up 11% and the Russell 2000 soaring 12%. Shutdowns historically have little long-term impact on equities, and so far, investors are sticking with the bullish script. Lower Treasury yields helped, driven by weak labor data and softer consumer confidence. Meanwhile, gold surged past $3,800 on safe-haven demand, oil tumbled more than 7% on OPEC+ supply signals, and crypto caught a bid, with bitcoin jumping 9.4% for the week.
What this means for investors
Shutdowns are noisy but rarely a game-changer. The economy is still growing, corporate profits remain strong, and rate cuts are likely to continue. Short-term pullbacks may happen, but history suggests they are opportunities, not warnings. Investors should stay diversified, keep some dry powder for volatility, and remember that markets have weathered 20 shutdowns since 1976, and have averaged a forward 12-month return of nearly 13%.
Market Activity
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Fixed income
Economic Reports
Starting Wednesday, Oct 1st, the U.S. government shutdown suspended operations for the Bureau of Labor Statistics and other similar agencies. Until operations resume, we aren’t going to get the economic data on its scheduled cadence. The Federal Reserve is still operating, so its reports will still be published normally as long as they aren’t dependent on data from other impacted agencies.
For now, we have to depend on alternative statistics such as ADP payrolls or Revelio Public Labor Statistics (chart later). ADP was ugly and had a bad revision on the previous month, but RPLS points to a positive and above forecast nonfarm payrolls.
Next week, we have dates penciled in for some of the major releases like jobless claims, nonfarm payrolls, and unemployment, but it is doubtful the shutdown will be finished by then. Until then, we’re working with private data only. This will likely last a while, given the positions of both parties.
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Earnings Releases
It’s not prime earning season yet, so there aren’t too many companies reporting, but the companies that are reporting can still offer insight into consumer spending, insurance, and travel trends in the absence of other economic indicators. Beggars can’t be choosers.
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Chart(s) of the week
Revelio Public Labor Statistics (RPLS) points to a positive and above forecast (51K) nonfarm payrolls. We’ll have to wait to find out when the government opens back up.
Via: @_SeanDavid
It’s hard to have a bear market when we keep clocking new all-time highs. New highs beget new highs.
“And on virtually no one’s bingo card, the S&P 500 made 23 new all-time highs in the third quarter, tying the most for any quarter since 1998.”
Source: Ryan Detrick, Carson Group
During the third quarter, analysts actually increased EPS estimates slightly for the quarter, which is a little unusual. The increase is very small (+0.1%), but it's the fact that there was an increase at all is out of the ordinary. The average change for the past 20 quarters was -1.4%, and this includes the huge upward revisions seen through the back half of the pandemic.
Source: FactSet
Related: Momentum or Mirage? The Market’s Bullish Run Faces Its Toughest Test Yet
*Stock Market Americans: Those who have major stakes in the market and benefit meaningfully from the growth of asset prices. More and more people fit this description every day, but the top of the stack are reaping huge rewards.