Navigating Markets Without Government Data
The US Government shutdown enters its second week, with no resolution in sight. But as discussed in this week’s CIO Bulletin, its impact may not be lasting or deep — for both capital markets and the economy at large. There have been 15 US government shutdowns since 1980.
The University of Michigan consumer sentiment survey should provide more clues on how the US consumer feels about the economy, jobs, spending, among others, when it is released later this week. It may also glean insights into the evolving K-shaped economy — where certain sectors of the economy appear to be benefiting while others are lagging behind.
The minutes from last month’s Fed meeting, where it lowered rates by 25 basis points, will also be released mid-week. These minutes should tell us about where the FOMC is on further cuts and what its board is thinking longer-term.
While still in its early days, the government shutdown, ongoing tariff announcements, and upcoming decisions around the White House’s tariff legality may result in a more volatile outcome than expected.
While we have gained confidence on a resilient nominal growth environment into year-end and remain constructive on risk in the medium-term, we still believe tariff-driven inflation and related impacts on consumption and margins are still in the early innings.
3 Things to Know
The US Government Shutdown’s Impact May be Muted
In the past, investors could look through shutdowns as a passing event because the government would subsequently catch up in all its important support programs for the economy – SBA loans, farm loans and relief programs, DoE loan guarantees, etc. — despite varying degrees of shutdown duration.
However, this one may result in larger disruptions due to the threat of mass layoffs of government workers rather than the typical furloughs. There is potential for a rise in jobless claims as some federal workers file for unemployment benefits, along with government contractors that miss out on backpay upon reopening.
Look Towards Private Data for More Clues
While the ADP employment print is historically not instructive for predicting payrolls, investors closely watched the negative print this week given the absence of government released data like NFP. ISM surveys, another important private data print, provided further evidence of a stable economy beyond the labor market.
As noted by the ISM Services report, “Employment continues to be in contraction territory, thanks to a combination of delayed hiring efforts and difficulty finding qualified staff.”
We are closely monitoring various other forms of alternative data to monitor the consumer, in particular. For example, Redbook Research indicated chain store sales rose 5.9% y/y through last week.
Taken together with OpenTable data on seated diners rising +8% y/y last week and +11% and +13% the prior two weeks, we continue to see evidence that the consumer is spending. While recent labor market data indicates a sluggish hiring and firing environment, full employment is supporting positive real wages and therefore robust discretionary spending.
Still, Data Points to a Strong 4th
When looking at data since 1990, volatility (as measured by the VIX) has undershot its average performance over the past five months.
Easy financial conditions aided by recent and upcoming Fed cuts have supported risk markets as investors focus on an optimistic outlook for 2026. Given the strong year-to-date performance, we looked at the past 90 years of S&P 500 returns to see if a return above 10% during the first three quarters would have any predictive ability for the fourth quarter.
Interestingly, 39% of the time since 1936, the S&P 500 is up 10% or more during the first three quarters of any given calendar year.
During these years, Q4 performance was higher on average (4.4% vs. 3.1%) and had lower levels of volatility (14% vs. 15.7%) than the Q4 performance when the S&P 500 was up less than 10% during the first three quarters. Even when the first three quarters are down, the historical data points to positive momentum in Q4. This can be driven by several factors like year-end portfolio rebalancing, holiday spending and year-end corporate earnings. Past performance is not indicative of future results.
See our weekly CIO Strategy Bulletin for more details