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The U.S. federal government shut down on Wednesday. Yet the market took it in stride.
Despite some nervous sellers overnight, the major indexes rebounded throughout the day. By Wednesday’s close, both the Nasdaq-100 and S&P 500 had clocked all-time highs, with Nvidia leading the charge.
Granted, the shutdown was widely expected. And previous shutdowns haven’t hit markets hard.
However, you can also attribute the minimal reaction to the market’s complacency.
Retail investors are used to making easy money. So a government shutdown is just something else to ignore…
The Fed’s Deliberations
No one knows how long the political standoff will last. It could be over in a matter of days.
For now, markets view the shutdown as just your typical partisan wrangling and point scoring. However, a shutdown has broad implications that extend beyond politics and the plight of federal workers.
At a crucial time, the Federal Reserve could be flying blind as it makes its next interest rate decision.
On Tuesday, we saw a small recovery in the Job Openings and Labor Turnover Survey (JOLTS) for August (up 19,000 from July). That was right around market forecasts.
Yet on Wednesday, ADP data showed that private businesses had cut 32,000 jobs in September… against expectations of a 50,000 increase. That followed August’s sharp revision lower – from 54,000 gained down to 3,000 jobs lost.
The ADP data marked the first back-to-back decrease in the private sector workforce since the peak of COVID around five years ago.
The latest nonfarm payrolls (NFP) and unemployment data were due out today. Lacking key information like this will become a bigger problem if the shutdown drags on.
Agencies like the Bureau of Economic Analysis and the Bureau of Labor Statistics simply won’t have staff to compile reports crucial to the markets and the Federal Reserve.
Key among these factors is whether the jobs market continues to weaken…
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Remain Wary
Recall that the annual NFP number was revised 911,000 lower last month. After a 22,000 gain in August, the market was expecting a 39,000 gain in September. And the market was interested in seeing whether unemployment rose after last month’s increase to 4.3%.
This data directly influences the Fed’s decisions…
Markets also expected the Services Purchasing Managers Index (PMI) data to determine if this sector can continue its rebound after hitting a six-month high last month.
Then there’s the Consumer Price Index (CPI) inflation data in a couple of weeks…
Markets are factoring in a 0.25% cut at the Fed’s meeting later this month. But the Fed may have to take a more conservative path if it doesn’t have clear data in hand.
And that means investors need to shake off their complacency…
Yesterday, we discussed how skewed this rally has become, with just a handful of mega-cap stocks supporting the rally. A growing number of other stocks are running out of steam.
And as we discussed on my podcast on Wednesday, volatility in October is 33% higher on average than in other months. Any surprise in the timing of interest rate cuts could potentially trigger a sell-off.
That may finally test the strength of buyers’ conviction…
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
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