2023 | October 23

The Markets

Stocks Fall

After posting fractional gains the previous two weeks, the S&P 500 fell more than 2% for its fifth negative result out of the past seven weeks. The NASDAQ and the Dow also posted weekly declines as investors focused on earnings results and bond market volatility. 

After recovering modestly the previous week, prices of government bonds resumed their recent slide, briefly sending the yield of the 10-year U.S. Treasury up to 5.00% on Thursday—the highest since 2007. While the 10-year yield slipped back below that threshold on Friday, the yields of 2-year and 30-year Treasuries both ended the week around 5.08%.

Subdued expectations for earnings season were scaled back slightly as a second week’s batch of quarterly results came in. As of Friday, third-quarter net income was expected to decline 0.4% compared with the same period a year earlier, based on S&P 500 companies that have already reported combined with projections for those still scheduled to report. In the previous week, analysts had forecast growth of 0.4%, according to FactSet.  

Bond yields rose and stocks fell on Thursday afternoon following a speech by Jerome Powell. The U.S. Federal Reserve chair signaled that the central bank could keep interest rates unchanged at its next policy meeting that ends on November 1. However, he also warned that inflation is still too high, and he said that more rate hikes are still possible if economic data continues to come in stronger than expected. 

The surprising strength of the latest monthly report on U.S. retail sales provided further evidence of consumer spending resilience. Sales rose 0.7% in September relative to the previous month—far exceeding most economists’ expectations—and data for August was revised higher to show sales advancing 0.8%. 

Amid escalating geopolitical tensions, the price of gold rose more than 3% for the week to the highest level in five months. Gold futures on Friday were trading just below $2,000 per ounce, up from a recent low of $1,835 on October 6. 

The world’s second-largest economy exceeded most economists’ expectations in the third quarter, as China reported that GDP grew at an annual rate of 4.9% compared with the same quarter a year earlier. On a quarter-by-quarter basis, GDP grew 1.3%, accelerating from a 0.5% rate in the second quarter. 

The U.S. government on Thursday is scheduled to release its initial estimate of third-quarter economic growth, with most economists expecting that GDP growth remained solidly positive, despite some earlier predictions that the economy could be on the verge of a recession. The upcoming report comes a month after the government revised its second-quarter GDP estimate to an annual growth rate of 2.1%, down from 2.2% in the first quarter. 

Source: John Hancock Investment Management

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How Could a Government Shutdown Affect Markets and the Economy?

One event that did not make the September Investopedia survey’s list of investor worries was the possibility of a government shutdown.

To date, Congress has failed to approve funding for the discretionary spending portion of the fiscal 2024 U.S. budget. Temporary spending is in place until mid-November; however, if Congress doesn’t take action soon, the government may shut down. A key issue is that the House of Representatives is experiencing a leadership vacuum and is currently unable to conduct business, reported Billy House, Erik Wasson and Ari Natter of Bloomberg.

When the government shuts down, “…many federal employees are told not to report for work, though under a 2019 law they get paid retroactively when the shutdown ends. Government employees who provide what are deemed essential services, such as air traffic control and law enforcement, continue to work, but don’t get paid until Congress takes action to end the shutdown,” explained David Wessel of Brookings Institute.

“Benefits such as Social Security and Medicare continue to flow because they are authorized by Congress in laws that do not need annual approval (although the services offered by Social Security benefit offices may be limited during a shutdown). In addition, the Treasury can continue to pay interest on U.S. Treasury debt on time,” continued Wessel.

The good news is shutdowns tend to have little effect on U.S. stocks. Since 1976, there have been 20 government shutdowns. The S&P 500 Index lost value nine times and gained value 10 times. One shutdown lasted only a few hours and didn’t have much effect on markets, reported Krystal Hur of CNN, citing data from Strategas Research Partners.

The bad news is government shutdowns can temporarily slow economic growth. “A government-wide shutdown would directly reduce growth by around 0.15 percentage point for each week it lasted, or about 0.2 percentage point per week once private sector effects were included, and growth would rise by the same cumulative amount in the quarter following reopening,” wrote Goldman Sachs Chief U.S. Political Economist Alec Phillips.

Events like government shutdowns and the pandemic highlight the importance of having several months of savings set aside in an emergency savings account.

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