With apologies to Cookie Monster, it actually looks like "C" is for calm.
Investors aren't sweating the government shutdown. The Cboe Volatility Index, or VIX, is in the mid-to-high teens, a muted level that hardly suggests Wall Street's so-called fear gauge is signaling panic. Stocks continue to trade near record highs, led by darlings such as Nvidia, Micron Technology, and Taiwan Semiconductor Manufacturing. Bitcoin, an asset that is even more dependent on investors' eagerness to take risks, is on a tear, too.
That exuberance might seem irrational. While Thursday's report on claims for unemployment benefits and Friday's monthly jobs report are on ice because of the government shutdown, there are other, worrying data to watch. Wednesday's surprise drop in private-sector jobs in September reported by payroll processor ADP, is a concerning signal.
Yet investors seem to be taking it as a positive, reasoning that the weakening job market is likely to give the Federal Reserve more justification to lower interest rates again later this month. In fact, futures are pricing in a nearly 100% probability of another rate cut at the Fed's Oct. 28-29 meeting.
Investors are also preparing for the flurry of third-quarter earnings reports due this month. A trickle of releases will land next week, with Constellation Brands, McCormick, Pepsi, Delta Air Lines and Levi Strauss on tap. JPMorgan Chase, Goldman Sachs Group, and several other big financial companies are set to release their results during the week of Oct. 13.
Analysts expect earnings to be solid. Current forecasts call for nearly 8% year-over-year growth in aggregate profits for the S&P 500 in the third quarter, according to John Butters, senior earnings analyst for FactSet Research Systems.
The combination of healthy earnings gains and the expectations of more monetary policy easing could juice stocks further in the fourth quarter, regardless of when and how the dysfunction in Washington, D.C., finally resolves itself.
"Despite shifting narratives and a carousel of concerns, the bull market continues to earn the benefit of the doubt as the economy muddles along, " said Keith Lerner, chief investment officer and chief market strategist at Truist Advisory Services, in a report Thursday.
The solid fundamentals are also allowing investors to overlook how pricey stocks are, he said. The S&P 500 currently trades at more than 22 times earnings estimates for next year, above its five-year average of 19.5 times.
"Market valuations are rich, yet profits remain strong and continue to serve as the north star for stocks," Lerner said.
Investors aren't concerned about the economy regardless of the shutdown, said JoAnne Bianco, senior investment strategist and partner with BondBloxx Investment Management.
"With the continued economic resilience and fundamental strength for U.S. companies, it's been a good environment to invest in corporate bonds," she told Barron's. "We're not expecting a significant economic slowdown or recession."
The risk of defaults seems low, even for companies with lower credit quality, she added. And investors are being compensated for any concerns about the economic big picture with yields of around 10% for debt rated below investment grade.
Another reason investors are ignoring the shutdown? We've been in a similar spot more than 20 times in the past 50 years. Most government shutdowns have been short, though one market strategist said investors can't shrug off the drama forever.
"While a short-run shutdown may not rattle the markets, longer or repeated shutdowns can reduce confidence," said Kezia Samuel, chief market strategist with AssetMark, in emailed comments to Barron's Wednesday. She added that shutdown worries could "cause investors to flock toward safe-haven assets like cash, short-term bonds, gold, as well allocate away from the U.S. markets a whole."
The latter hasn't happened yet as stocks continue to rise. But gold has also benefited from the shutdown. The yellow metal is now trading around $3,900 an ounce, near a record high.
To be sure, gold's run may have as much to do with the weaker U.S. dollar and expectations of rate cuts than it does the shutdown. But Samuel says investors shouldn't relax.
"A short shutdown, while not ideal, is not a deal breaker for markets," she said. "If the shutdown goes beyond 14 days, it will leave investors and the Fed 'flying blind' when it comes to being able to rely on critical data."
Investors are probably wise to not sweat the shutdown too much yet. But if the government hasn't opened back up in a few weeks and stocks continue to climb, then that C might no longer be for calm. It would stand for complacency.
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