Markets Shrug Washington's Shut Down: What Investors Are Really Watching

Markets stay resilient despite Washington gridlock

The U.S. government shutdown has now stretched into its second week, making it the fourth-longest in history. Naturally, lawmakers seem in no rush to fix it, hoping to score points for their respective team, which doesn’t include the American people. Roughly 650,000 federal workers have already missed paychecks, and that number could surpass 3 million if the standoff continues into mid-October (without any creative funding that is). Yet, despite the mounting disruptions, markets seem largely unfazed by the shutdown itself. Investors are more focused on AI headlines, interest rates, and trade policy than tiresome political drama.

Last week, stocks briefly hit new all-time highs before retreating sharply on Friday after President Trump floated the idea of “massive” new tariffs on Chinese goods. The S&P 500 ended the week lower, snapping a 48-day streak without a 1% daily drop, the twelfth-longest such stretch since 2000. The Nasdaq and S&P 500 took the biggest hits, while defensive sectors like utilities and health care fared better. Meanwhile, gold glittered brightest, breaking above $4,000 per ounce for the first time ever and serving as a reminder that real gold is still the best gold—digital or otherwise. These recent moves say less about inflation and more about investors’ fading confidence in political stability and government debt management.

The Federal Reserve, meanwhile, is navigating without much fresh economic data. CPI is now expected on October 24th, nine days late and only four days before the next FOMC meeting. Odds overwhelmingly favor another quarter-point rate cut, with odds near 95%. Treasury yields dipped as investors sought safety last week, and small-cap stocks continued to outperform, another bet on lower rates.

Oil prices bounced early in the week but fell again as trade and geopolitical tensions modulated. Bitcoin and other cryptocurrencies followed the same pattern: setting new highs before sliding alongside equities.

What this means for investors

Volatility is back, but that’s not necessarily bad news. After such a long stretch of tranquility, a little profit-taking and consolidation is healthy. Better to have it a little at a time than all at once when something big really breaks. Temporary dips often create opportunities for disciplined investors, so try to be one. While political noise and trade tensions may keep markets jumpy, economic fundamentals, while not perfect, remain sound.

Market Activity

Vol is back, baby! Some of you forgot how to manage risk, I think.

Stocks

Fixed income

Economic Reports

Thin week for economic reports because of the government shutdown. Federal Reserve events dominate the calendar, so I didn’t include them all. I’ll take what we can get.

CPI is now expected on October 24th (instead of October 15th). The rest of next week is listed as scheduled, but it's unlikely they will happen on time. This shutdown won’t end this week.

Last week

Next week

Full Economic Calendar

Earnings Releases

Earnings season is back, and expectations are higher than in the last few quarters. Earnings are rarely about the absolute value, but more about the expectations. Meeting expectations, even recently raised expectations, isn’t as satisfying as clearing a sandbagged target. Call me cautiously optimistic, but more worried about these pending results than the prior two quarters.

Last week

Next week

Full Earnings Calendar

Recommendations

• The Compound & Friends with Denise Chisholm | Fidelity’s Director of Quantitative Market Strategy is smart. The whole interview is fascinating, but if you only have 7 min, start at 43 min mark for her top three market indicators.
• The stock market is fueling America’s economy | The wealth effect is very real. The stock market and the economy aren’t one and the same, but they do feed one another.
• Inflation Report Will Be Released Despite Shutdown | CPI will be published on October 24th. This is a win for the Federal Reserve (and all of us) who meet on the 28th. But the reason this report gets special-treatment is only because of the requirement to recalculate Social Security COLA. I would have preferred to hold that hostage to force Congress to act like adults and end this.
• Issue 94 – Backdoor deals | Molly White details the never-ending corruption, shady dealings, and criminal stupidity of the best and brightest in the web3 space. At least we can look forward to a stronger SEC in the future when this all blows up again.

Unrelated, but also case in point…

Chart(s) of the week

As surprising (and frustrating) as Friday’s tariff announcement was, it feels like an excuse to consolidate and take profits. The market was on a tear without much volatility for a month and half. We were due for a pullback and that can be healthy.

“The equity-market rally over recent months has been impressively consistent. Until Friday’s trade policy inspired wobble, we had not seen a 1% daily decline in the benchmark S&P 500 in nearly 50 days2. Over the past 25 years we have only seen 12 longer streaks2.”

Source: Edward Jones

Note: The administration says it has funds to pay members of the military this week. If they pull it off, that will take a lot of pressure off Republicans and likely extend this situation much longer.

Source: Bipartisan Policy Center via Business Insider

Breakeven payroll growth is lower than I thought, based on this report from the Dallas Federal Reserve. At 30k per month, the bar isn’t that high to clear, and supports a stable unemployment rate for the near-term. Weak hiring is still a major problem for those looking for work (or soon-to-be—looking at you, Federal workers). A frustrated long-term unemployed cohort isn’t a sign of a healthy job market, but we shouldn’t be expecting a major acceleration in unemployment without a sizable labor shock.

Source: Federal Reserve Bank of Dallas

Related: Markets Rally in the Dark: Why Investors Shrugged off the Government Shutdown