The federal government gets back to work

Markets sold off this week despite the long-running US government shutdown saga finally reaching its conclusion. At 43 days, it lasted longer than the 35-day record set during President Donald Trump’s first term. For investors, a key consequence was the absence of economic data due to the furloughing of many federal workers. Data for jobs, GDP and inflation and other areas were not collated or published, making it difficult to accurately gauge the state of the US economy. A vote on Monday by the US Senate to end the standoff was confirmed by the Republican-controlled House of Representatives on Wednesday.

Markets initially climbed on news, with the S&P 500 Index reaching a 6,857 high for the week on Wednesday, a 3.3% increase on the previous Friday’s close. The gains were short lived, however, as global markets then tumbled over renewed concerns about tech valuations. By Thursday’s close, the Nasdaq Composite had fallen 2.3% and the S&P 500 retraced 1.7% of its gains.

The investment manager’s view

Damian McIntyre, Head of the Multi-Asset Solutions Team at Federated Hermes, highlights the data backlog created by the US government shutdown, which investors will now have to work through – but notes it’s unlikely to be a game changer. “We only missed a little over a month’s worth of data, and that’s not long enough to change the long-term trends of moderate inflation, slow job growth and strong consumer confidence we saw this summer,” he says. “Additionally, there was a lot of private data released during the shutdown and none of it was particularly different from expectations.”

Susan Hill, Senior Portfolio Manager, Fixed Income, Federated Hermes, highlights one key effect of the shutdown: higher overnight funding rates at the front end of the yield curve. This, she says, is a consequence of the Treasury Department’s high operating cash balance, which, in turn, was the result of delayed outflows to pay workers’ salaries. This aside, the most notable impact of the shutdown on liquidity markets, she says, was the lack of official data and the degree to which that may have influenced the Federal Reserve’s approach to future policy actions.  

For Paul Dalton, Investment Director, Equities, Federated Hermes Limited, the shutdown’s resolution removes some near-term uncertainty and should be seen as a positive. “However, we remain mindful that the truce is temporary,” he adds, noting that the next deadline for US government funding arrives on 31 January. “Whether this pause creates room to negotiate a more lasting deal remains to be seen,” he continues. “For global equities, the end of the shutdown has been modestly supportive, and the resumption of data collection should provide investors with better visibility on the state of the US economy. That said, there are caveats: the lag in data may leave some ambiguity around the true economic picture, and key risks persist – including inflation pressures, the strength of the US consumer (which cannot have been helped by the shutdown), the trajectory of monetary policy, the debate over whether the AI trade is a bubble and, despite the recent truce, the potential for US–China tensions to escalate.”

Charlotte Daughtrey, Equity Investment Specialist, Federated Hermes, notes the resilience of US equities despite an initial wobble under the weight of uncertainty during the shutdown. “With the government reopened and policy clarity improving, conditions appear supportive for continued gains into year-end,” she says.