A sign announces that the U.S. Capitol Visitor Center is closed, on the first day of a partial government shutdown on Wednesday.Julia Demaree Nikhinson/The Associated Press
The investing masses have gotten very good at tuning out political dysfunction. They’ve had lots of practice this year.
The policy turmoil flowing endlessly out of Washington has been loud and overwhelming, but it has done little to spoil a rollicking bull market in stocks.
So when the U.S. government shut down on Wednesday over a federal spending deadlock, financial markets shrugged. The S&P 500, along with other major American indexes and the TSX, finished the day up by less than a percentage point.
History strongly suggests this is the appropriate reaction. These episodes are almost always short-lived and inconsequential to stock returns.
But the timing of this one isn’t great.
The stock market is sizzling even as the real economy is at risk of tipping into recession. That disconnect seems to grow wider by the day.
Impasse on health care funding shuts down U.S. government
Investors have become hyper-attuned to economic indicators and whether they suggest the bull market can continue to scale new heights despite the weakening economy.
This is no time to be flying blind. But that’s the reality with this shutdown, which puts the collection and release of most government economic data on hold.
There was supposed to be a U.S. jobs report this Friday, for example. The last two monthly reports showed a swift weakening of the labour market and big downward revisions to previous months’ estimates.
The government shutdown has sparked intense political battles, with both parties blaming each other.
The Associated Press
Analysts had been expecting the next report to show gains of about 50,000 jobs for September. Now, investors will be left to wonder whether U.S. unemployment continues to rise – a telltale sign of a weakening economy.
Not that that’s necessarily a bad thing by the sometimes bizarro logic of the financial markets, where bad news can be good news.
For example, in the two months since U.S. jobs data took an ugly turn, the S&P 500 index has gained 7.6 per cent.
An outright recession would be bad for the stock market. But some amount of deterioration in the real economy is tolerated – even desired – by investors, for what it means for interest rates. A great deal of market sentiment hinges on the U.S. Federal Reserve cutting rates in the weeks and months ahead.
U.S. government shutdown threatens to disrupt IPO market momentum
The Fed just resumed its easing cycle with a rate cut a couple of weeks ago. The market is now pricing in a 100-per-cent chance of another cut at the Fed’s October meeting.
The problem is that the Fed is highly data dependent. And the data it depends on may not be available.
“Fed policy is not on a predetermined path as policymakers evaluate employment and inflation trends,” Angelo Kourkafas, an investment strategist at Edward Jones said in a note.
The next inflation report is supposed to be in about two weeks. That, too, is up in the air.
Like employment, U.S. inflation has also been going in the wrong direction. Four consecutive months of increases have lifted the inflation rate to an uncomfortable 2.9 per cent.
It’s not outrageous to think Fed Chair Jerome Powell could hold off on the next rate cut in the absence of the two data points the Fed is mandated to target. For most of the year, he was willing to hold the line on rates over fears of reigniting inflation, to the chagrin of U.S. President Donald Trump.
And if you want to see investors throw a tantrum, take away a rate cut they thought was in the bag.
Chances are this shutdown, like shutdowns past, won’t amount to much for financial markets.
But it leaves investors in the dark about the economy at a tricky moment.