Where does the Stock Market stand as Washington hits a standstill?
GUEST BLOG / By Angelo Kourkafas-- Angelo Kourkafas is responsible for analyzing market conditions, assessing economic trends and developing portfolio strategies and recommendations that help investors work toward their long-term financial goals. He is a contributor to Edward Jones Market Insights and has been featured in The Wall Street Journal, CNBC, FORTUNE magazine, Marketwatch, U.S. News & World Report, The Observer and the Financial Post. Angelo graduated magna cum laude with a bachelor’s degree in business administration from Athens University of Economics and Business in Greece and received an MBA with concentrations in finance and investments from Minnesota State University.
NOTE: Edward Jones has been financial advisor to PillartoPost.org for more than 20 years.
Key takeaways
Here we are again, the Government has shutdown. The U.S. government has shut down, halting nonessential operations and delaying key economic data releases such as jobs and inflation reports.
Economic impact limited for now - While a prolonged shutdown could weigh on growth, the current economic momentum driven by resilient consumer spending and record artificial intelligence (AI) investments should help cushion the blow.
Labor market softening - Hiring is slowing, though layoffs remain limited outside the government sector. With official data unavailable, the Fed may rely on weaker private indicators such as ADP payrolls, keeping its focus on the labor market and continuing interest rate cuts.
Market resilience persists - Stock momentum continues, led by AI and rate-sensitive sectors. Shutdowns have historically had minimal long-term impact, and any pullbacks may offer opportunities to add exposure to underrepresented areas of portfolios.
At the stroke of midnight on Sept. 30, the U.S. government officially shut down after lawmakers failed to reach a funding agreement. The immediate impact: a halt to nonessential government operations, widespread furloughs and a pause in key public services.
For investors, perhaps the most consequential disruption is the suspension of critical economic data releases, such as inflation and employment reports, that markets and the Federal Reserve rely on to guide decisions.
Under normal circumstances, we'd analyze the September jobs report, scheduled for release on Oct. 3. But with the data on standby, we're shifting our focus to examine where the economy, labor market, Fed policy and financial markets stand as we navigate this period of statistical silence.
Economy: Still growing
Since July, economic data have broadly surprised to the upside, driven by:
--Resilient consumer spending
--Heavy AI investment
As a result, the Atlanta Fed currently estimates third-quarter GDP growth at 3.8%, signaling strong momentum just before the data blackout.
More specifically: Retail sales have accelerated over the past three months through August, reaching their fastest pace since early 2023. While the September report may not be released on Oct. 16 if the shutdown continues, auto sales for the month came in better than expected. Additionally, same-store sales tracked by the Johnson Redbook Index (a sample of large U.S. retailers) grew at a solid 6% pace in September.* Both datapoints are reported by the private sector and not impacted by the shutdown.
On the AI front, investment in equipment and intellectual property is contributing meaningfully to GDP, growing at its fastest rate since the internet boom of the late 1990s.* Major tech firms are doubling down: Amazon, Google, Microsoft and Meta alone are projected to spend nearly $400 billion on capital expenditures next year, roughly 30% of total estimated S&P 500 investment spending.
Shutdown impact
As outlined in Government shutdowns and the markets - 3 things to know, we expect a short-term slowdown in growth during the shutdown, followed by a quick recovery once funding resumes. Because furloughed federal workers are guaranteed backpay, the shutdown tends to delay rather than eliminate spending and economic activity. That said, businesses dependent on government contracts may experience permanent income loss.
Historical precedent suggests a potential drag of 0.1%-0.2% on quarterly GDP growth for each week of closure.* The longer the shutdown lasts, the more noticeable the economic impact, and the greater the political cost for both parties and pressure to reach an agreement. The upshot: While growth may slow in the fourth quarter, it does so from a strong starting point, with activity likely rebounding in the first quarter, assuming the shutdown lasts weeks rather than months.
Bottom line: Keep calm and carry on
Driving at night with headlights suddenly off is unsettling, but swerving in panic rarely leads to good outcomes. Similarly, making abrupt investment changes in response to a government shutdown may not be prudent.
We think the combination of a growing economy, rising corporate profits and declining interest rates supports a positive outlook for stocks. This won’t eliminate bouts of volatility along the way, but against this backdrop, we’d view market pullbacks — particularly any weakness spurred by government shutdown anxiety — as a compelling buying opportunity.
We continue to favor U.S. large-cap stocks with high exposure to AI. However, given these stocks’ multiyear outperformance, investors may want to use pullbacks to diversify into underrepresented areas with catch-up potential, such as U.S. mid-caps and cyclical sectors.
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