By Kyle Tetting
Investors saw the fog of rate uncertainty clear in September. The Federal Reserve Board decision to cut the overnight rate a quarter-point shone light on a path toward a more favorable environment for growth.
That decision provided hope that the Fed would not be too far behind any economic slowing as stock investors broadly cheered a market rally into the end of September. The celebration may be short-lived, however. The prospects of a prolonged government shutdown have let the fog roll back in.
Data dependent
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Recent conversations from the Fed had begun to center around labor market data that was softening, even as inflation remained elevated. Cognizant of its dual mandate for stable prices and full employment, the Fed said labor market softness gave it just enough clarity to reduce the restrictive nature of the overnight lending rate and signal potential easing ahead. In plain English, the Fed cut rates and suggested a willingness to do more – dependent on the data.
“Data dependent” is a phrase that’s done considerable heavy lifting at the Fed. If you can’t see where you’ve been, it’s even harder to try to ascertain where you’re going. So, it made sense that voting members of the Fed scoured tables and charts in hopes of understanding what potholes might be coming.
To that end, the Department of Labor suspending operations as a result of the shutdown couldn’t come at a worse time. A key monthly jobs report, which was supposed to be released Oct. 3, has been delayed. And additional economic data points will be delayed and may be less reliable the longer the shutdown drags on.
Of particular concern is the calculation for the Social Security cost-of-living adjustment, which is tied to the Consumer Price Index inflation reading, scheduled to be released Oct. 15. A delay in that calculation means retirees may have to wait to learn about their Social Security benefit increases. In addition, the Fed would be operating without typical data points on employment and inflation.
Investor resilience
So far, encouragingly, investors seem to be taking the shutdown in stride. Broad measures of U.S. stocks have maintained near all-time highs, with all three major indexes posting record closes just a day after the shutdown began.
The most recent bout of uncertainty is yet another sharp reminder that even amid potential disruption, investors can be surprised by positive returns. It wouldn’t have been my baseline expectation to see stocks rally through the shutdown, but it’s why we fall back on balance rather than market timing – even when the bad news is obvious. You can be right about the headline and still be wrong about the market reaction.
2025 has given us plenty of reality checks on the need for balance, but more than ever, the current environment reminds us how important it is to know where we are if we’re trying to figure out how to get where we’re going.
With that in mind, I’m looking forward to our 2025 annual seminar as a way to update investors on just that. We’ll have some conversation on the opportunities ahead, but it’s also a good chance to shine a light on where we are and how we got here.