The longest government shutdown in American history has also been included among the various challenges overcome by the continuous rise of the stock market this year. During the 40 days since the US government shutdown began on October 1st, the S&P 500 index rose by 0.6%. On Monday, as it seemed that the situation would soon come to an end, the index rose sharply again.
From a historical perspective, the current market conditions indicate that a round of upward movement will follow in the coming period until the holiday season.
One month after the prior 15 shutdowns ended, the S&P 500 advanced 2.3% on average, according to data crunched by Sam Stovall, chief market strategist at CFRA. A gain of that magnitude would leave the benchmark for American equities just shy of 7,000 by mid-December.
The latest government impasse could end as soon as Wednesday, after Senate Democrats agreed to a full-chamber vote on a deal that still needs approval in the House of Representatives. Investors cheered the detente on speculation widespread damage to the economy and corporate profits have been averted. Attention can now revert to the path for monetary policy — a third straight Federal Reserve rate cut is expected next month — and the impact of tariffs on inflation.
“It’s a modest relief that we can move forward on this, but then pretty quickly the market attention will go back to the discussion around technology and the biggest part of the market,” said Keith Lerner, chief investment officer and chief market strategist at Truist Advisory Services Inc. He expects investor attention will now flip to Nvidia Corp. earnings on Nov. 19.
The five-week government closure wasn’t without turbulence for stocks. The S&P 500 plunged 2.4% the week ending Oct. 10 after President Donald Trump stoked trade tensions with China. It slid 1.6% last week, as the artificial intelligence trade started to look a bit bubbly. In between, though, equities rallied more than 4% over three weeks as corporate earnings came in stronger than expected. The index’s gain of 2.2% since the shutdown began beats the average stock performance during prior shutdowns going back to 1981, according to CFRA data.
It now looks like a further correction, after last week’s pullback, will be “postponed” with the shutdown ending, Stovall said. “History says that a month after the shutdown has come to a close, the market is up.”
Strategists see more gains from here as federal workers return to the job and regular economic data reports resume, removing some uncertainty from market that still managed to eke out gains without that activity. In particular, the declines in some of the market’s highest flyers — notably the seven Big Tech giants that account for about a quarter of the S&P 500 by weighting — may look enticing to dip buyers.
“With the tail risk from the government shutdown likely behind us, taking advantage of the recent decline in the AI usage names is interesting,” said Dennis DeBusschere, president and co-founder of 22V Research LLC.
He recommended investors consider a trade that is long stocks that use AI, like Nvidia Corp. and Constellation Energy Corp., and short a basket of names that don’t use AI. The former group will see an outsize boost to sentiment as policy uncertainty had “finally started to weigh on asset prices again,” DeBusscherre said.
Investors see other corners of the market, including those that contract to the US government like CACI International Inc. and Palantir Technologies Inc., getting a lift with the end of the shutdown.
“The thought of more fiscal stimulus is causing the investors to re-think the debasement trade and that is bringing back the small amount of stock market valuation retreat that happened as of late,” said Matt Miskin, co-chief investment strategist at Manulife John Hancock Investments.
Not all aspects of the likely end to the shutdown are positive for the stock market. The absence of official economic data on inflation and the labor market, in particular, allowed investors to perhaps ignore the threat to both sides of the Fed’s mandate on employment and price stability.
“It’s a kind of a two-way risk,” said Lerner at Truist, adding there may be economic data surprises for the market to process. “If some of the economic data, especially the employment data comes in widely different than the mosaic that they’ve been using, that could be good or bad,” he said.
The Senate compromise did not extend subsidies to the Affordable Care Act insurance policies at the heart of the tiff among Democrats and Republicans. That sent insurers that participate in the government program like Centene Corp. and Molina Healthcare Inc. sharply lower Monday. The two sides are expected to discuss an extension to the funds that expire at the end of the year, but nothing is guaranteed.
In addition, the stock market is also confronted with several unfavorable factors, including excessive valuation, concerns over the situation of American consumers, and the difficulties faced by specific industries (such as healthcare enterprises).
However, many Wall Street strategists believe that, at present, the entire market is expected to continue to rise driven by government spending, and at the same time, market sentiment will also be somewhat boosted.
“That’s offering some relief to investors,” CFRA’s Stovall said.
Comments