Will a Government Shutdown Kill the Market Momentum?
September delivered a fascinating mix of market strength and political noise. While headlines were dominated by the government shutdown and interest rate chatter, the real story for investors was one of broadening growth and surprising resilience.
The Fed, the Shutdown, and the Real Economy
The biggest news item in September was the Federal Reserve's decision to cut interest rates by 0.25%. This move, along with signals of more cuts to come, shows the Fed is shifting its focus from inflation to protecting the labor market. Their own projections see unemployment remaining historically low through 2028, reinforcing a confident outlook for the U.S. economy.
Of course, the government shutdown added a layer of uncertainty. Historically, shutdowns have had minimal long-term economic impact, and markets have often risen during them. The main issue this time is the delay in economic data, which complicates the Fed's job. Without official reports from the Bureau of Labor Statistics, the Fed is flying a bit blind. Still, the futures market is pricing in a 98% chance of another quarter-point cut in October. My take is that the Fed has seen enough softening in private labor data to proceed with its plan to support the economy.
Critical Question:
How Long ? The shutdown could also affect economic productivity. According to JP Morgan, each week, a shutdown subtracts about 0.1% of annualized GDP growth via reduced government activity. A shutdown longer than a month or so may begin to damage investor sentiment, even though the economic backdrop is positive. We will be in unchartered territory if the shut down lasts several months.
Growth Appetite at Play
- The S&P 500 posted eight new closing highs and is up 14.83% year-to-date.
- International markets outperformed, with developed markets up 25.72% and emerging markets up 28.22% year-to-date.
- A weaker U.S. dollar has made foreign assets more attractive, driving investor interest overseas.
Growth Stocks and the Mag 7
Within the U.S. market, the preference for growth stocks continues. The Russell 1000 Growth Index gained 10.5% in September, nearly double the rise of its value counterpart. This trend is largely powered by the "Magnificent 7"—tech giants like Nvidia, Microsoft, and Alphabet—which now account for nearly 35% of the S&P 500's market value. In September alone, this small group was responsible for 64% of the index's total return.
While their dominance is undeniable, it also highlights where value might be found. Small-cap stocks, for instance, are trading at a significant 16% discount to our fair value estimates. As professionals with large cash positions chase performance into year-end, we believe any market dips will be shallow and met with strong buying, particularly in these undervalued areas.
Finding Opportunity Amidst the Noise
So what does this mean for your portfolio?
- Diversification is Paying Off: The outperformance of international equities is a powerful reminder that a global approach is essential. Tariff concerns in the U.S. are leading many to look abroad, and the results speak for themselves.
- Look for Value: While growth and tech have had a great run, small-cap and value stocks appear much more attractive from a valuation standpoint.
- Don't Fear the Headlines: The market has a way of looking past short-term political drama. The underlying fundamentals—strong earnings, a supportive Fed, and broadening global growth—paint an optimistic picture.
The great performance chase to year-end is on. Many managers who were defensively positioned earlier this year are now trailing their benchmarks and need to put cash to work. This creates a strong technical tailwind for stocks. While the path forward is never a straight line, the foundation for continued growth looks solid.
Finding Opportunity Amidst the Noise
So what does this mean for your portfolio?
- Diversification is Paying Off: The outperformance of international equities is a powerful reminder that a global approach is essential. Tariff concerns in the U.S. are leading many to look abroad, and the results speak for themselves.
- Look for Value: While growth and tech have had a great run, small-cap and value stocks appear much more attractive from a valuation standpoint.
- Don't Fear the Headlines: The market has a way of looking past short-term political drama. The underlying fundamentals—strong earnings, a supportive Fed, and broadening global growth—paint an optimistic picture.
The great performance chase to year-end is on. Many managers who were defensively positioned earlier this year are now trailing their benchmarks and need to put cash to work. This creates a strong technical tailwind for stocks. While the path forward is never a straight line, the foundation for continued growth looks solid.