We are watching news out of Washington D.C. this week for what is expected to be a few weeks of tough negotiations to try and avoid a government shutdown on October 1st. Negotiations are set to begin this week when both chambers of Congress are set to be in session for the first time since July. There is no doubt that investors will be watching negotiations closely for potential impacts on the market. We have been looking back in history to see what impact previous government shutdowns have had on the markets, and history says the market takes government shutdowns in stride. We looked at research into the past 20 government shutdowns since 1976 and the impact on markets and found that the market was almost exactly flat after adding all the stoppages together. While government shutdowns cause initial volatility, the market action has depended more on other factors like corporate earnings. When looking at the specific performance of certain government shutdowns that lasted longer, market performance hasn’t been impacted as much as investors might think. Even in the 2018/2019 standoff, the longest in history, the S&P 500 rose almost 8%. As always, we analyze historical market performance in preparing for events like government shutdowns, which will undoubtedly be a hot topic over the next two weeks. There are no guarantees, and every event is different, but history says the market takes shutdowns in stride.
Interest Rate Decision
The Federal Reserve will meet this week and make their announcement about the current rate policy. The market fully expects no action and for the Fed Funds Rate to remain at a high-end level of 5.5%. The next meeting will be on November 1st. The Fed has spoken a lot about how they will be very data-dependent in their decisions. We’re at a critical inflection point where we’ve seen inflation bottom in July but increase in the last two inflation reports. Is this just an anomaly caused by potential increases in oil, or is this a trend that the Fed needs to keep an eye on? This is happening at a time when the data may stop due to a shutdown. When the government shuts down, most people don’t notice, and the reason for that is that the market doesn’t have an impact. Most people besides us don’t notice that government reports like inflation and jobs don’t come out during the shutdown. This time may be different, with the Fed noticing very much that the government is shut down. If that important CPI report that we are supposed to get in mid-October, or the jobs data in early October does not come out, what data will there be for them to make their very important interest rate decision? This is something the Federal Reserve will have to watch closely, which is why this is such an important pivot point. Our research partners, Strategas, looked over 2,000 years of economic history, and in those 2,000 years across 24 countries, they found 62 instances of higher prices or inflation. Of those 62 instances, only eight saw prices go up and then come back down and stay down. Every other instance, they saw prices rise, come down, and then back up again for at least a second, maybe even a third wave. The Federal Reserve wants to keep on that because they do not want that second wave to come. We saw prices come down, then saw a tiny hitch up. Does that hitch continue, and are we looking at a second wave? That’s something the Fed very much wants to keep from happening. If they don’t have the data to support that, what are they going to be relying their decision on? We’re going to watch this closely, and the markets will start watching very closely as we get close, not just to the next Fed meeting, but those traditional data releases.
The Consumer Stress Indicator measures food at home, mortgage rates, and gasoline prices. They lump them all together and get a number. For this cycle, we peaked at 24 on the Consumer Stress Indicator, which is high. It’s come down steadily down to 14%. We’re starting to moderate that decline, but 14% is still about 40% higher than the indicator average throughout the 2010s. Right now, we’re at 14%, which is good. Do we continue to moderate back down to that 8% number or flatten out? That will be interesting to see since we have many headwinds that the consumer is facing. Gasoline prices are now positive year-over-year for the first time in seven months. At the beginning of the year, gas prices showed some substantial improvement for the consumer, but now they’re coming back up. The amount of workers on strike in the United States has gone up. We have many factors to consider when it comes to consumer stress. One interesting statistic that lumps in with the Consumer Stress Indicator is the chart in this video that shows Consumer Pain by city. Miami has consistently been at the top; however, Detroit overtook them at 10.7%. It will be interesting to see what happens going forward with the new strike and something we will keep an eye on.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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Stock investing involves risk including potential loss of principal.
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