“Games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard.”
-Warren Buffett
Here’s what you need to know this week:
- Stocks end their winning streak
- An explainer on government shutdowns and their impacts on the investment markets
Speedbump
Markets eased lower last week after posting three straight weeks of gains[1]. Three catalysts caused investors to pump the brakes: inflation, new tariffs and a potential government shutdown (more on this in the second segment). On Friday we received the Personal Consumption Expenditures (PCE) report for month of August; the PCE report is the Federal Reserve’s preferred measure of inflation, and the report showed monthly inflation at 0.2% and annualized inflation at 2.9%[2]. While this was in line with Wall Street estimates, it also shows inflation persistently sticking above the Fed’s long-term target of 2% and may endanger future interest rate cuts.
Next was new industry-specific tariffs announced by President Trump on Friday. The new slate of tariffs imposes a 25% levy on imported heavy trucks, 30% on upholstered furniture and 50% on kitchen cabinets[3]. Additionally, Trump announced a 100% tariff on imported pharmaceuticals unless the pharmaceutical company is currently building a manufacturing plant in the US[4]. The President and proponents of this plan believe these additional tariffs will incentivize more US manufacturing while detractors say they inject more uncertainty into an already-volatile global trade arena.
What’s In a Shutdown?
As of writing (Tuesday afternoon) it appears that the federal government is careening towards another government shutdown. Many shutdown standoffs in the past have resolved at the eleventh hour and it’s possible that a deal will be struck later today, rendering this entire section moot. However, this is a good opportunity to discuss the effects of a government shutdown on investment markets.
First off, what exactly does a “government shutdown” entail? Many departments such as the IRS and Treasury are partially or fully closed while a few essential branches remain open:
The employees of these departments are typically furloughed during the shutdown and remain unpaid until the shutdown is resolved. The departments’ outputs are also put on hold: for example, the Bureau of Labor Statistics is set to release the nonfarm payrolls (NFP) jobs report for September this Friday, but the report will obviously not be released if no one is there to release it.
The absence of key economic data such as the unemployment and inflation reports may inject uncertainty in the markets due to their impact on the Federal Reserve’s interest rate cutting schedule, but for now markets have been relatively unperturbed. This could be viewed as a sign that markets expect a quick resolution, which is understandable; in previous shutdown standoffs, a large majority were resolved just before the deadline or within a few days after the shutdown starts:
While the market is behaving calmly for now, the broader public tends to react more dramatically. The US Consumer Confidence Board conducts monthly surveys of US civilians regarding their feelings on the economy, and a government shutdown nearly always precipitates a pronounced drop in consumer confidence:
Why does this matter? Because people act on this lack of confidence, in particular by selling stocks to wait out the storm. In fact, every shutdown but one has led to a decline in stock prices:
While this chart may look intimidating at first, there are two reasons to remain optimistic. First, two of the three large drawdowns came mostly as a result of factors unrelated to the government shutdown; namely, the major inflation spike in 1981 and the recession in 1990. Second, you can see that the 2018 shutdown led to major market gains by the end of the shutdown. This is why it is so important to never panic-sell into events like these: if you miss the day the event resolves then you may miss the entire snapback. Even if the potential shutdown is averted by the time you read this, I hope this provides a better understanding of government shutdowns and their impacts on the markets.
What Else
- President Trump and Israeli Prime Minister Benjamin Netanyahu held a joint press conference on Monday to announce a Peace Proposal for Israel and Gaza
- Hurricane Humberto passed the east coast with minimal damage
- President Trump ordered the declassification of all federal files related to Amelia Earhart, the pioneering pilot who disappeared more than 90 years ago
- The European team barely pulled off a win against the US team in this year’s Ryder Cup
- The NFL announced that Bad Bunny will headline the next Super Bowl halftime show
What We’re Reading
Everyone knows that architecture is math, but few stop to really consider all the math that goes into the design of famous buildings. Young Spanish mathematician Nicolás Santos has set out to change that, creating a “math trail” walking tour through the streets of Barcelona. Click below to see an interactive video following his math trail which includes the world-famous La Sagrada Família, a Catholic church that towers over the famed Spanish city:
What’s Happening Downtown
The Scissortail Night Market returns this Friday, October 3rd. This event runs from 5:30 – 10:00 PM and features dozens of local vendors, food tents & trucks, live music & art performances and more. Click below to learn more:
To read more from our blog, click here
Written by: Kane Ogle, CFP®
Steve Beck, Kane Ogle, CFP®, Amber Eduvigen, CFP®, Cale Olbert, CFP®, Brett Valentine, CFP®, Brandon Ingerson, Bill Daniel, Sam Postich, Jenni Hess
Sources: [1] Yahoo! Finance [2] CNBC [3] Bloomberg [4] Reuters