Historically, a federal government shutdown does not hinder the stock market. Bespoke Investment Group documented what happened during the last six federal government shutdowns. Specifically, the S&P 500 after a week, month, three months, six months, and one year later was up a median of 0.6%, 2%, 6.6%, 12.1% and 19.7%, respectively. Since the private sector is perceived to be better than the government sector, believe it or not, productivity may actually rise during the federal government shutdown.
Fortunately, Treasury yields plunged on Wednesday when reported that 32,000 private payroll jobs were lost in September, which was below economists’ consensus of a 45,000 increase. Furthermore, ADP revised the August private payroll report to a loss of 3,000 jobs, down from 54,000 private previously reported. Finally, ADP reported that 13,000 private payroll jobs were lost in June, so ADP has reported job losses for three of the past four months. This is the first time that there have been job losses since 2020, so the problems in the labor market are real. The Fed is now expected to cut key two more times this year due to ongoing labor market problems as well as plunging Treasury yields.
The Institute of Supply Management () reported that its manufacturing index rose to 49.1 in September, up from 48.7 in August. Although any reading below 50 signals a contraction, the ISM manufacturing index is improving under the surface after contracting for seven months. The production component rose to 51 in September, up from 47.8 in August. Another green shoot was the backlog of orders component improved to 46.2 in September, up from 44.7 in August. Overall, only 5 of 16 sectors improved in September, since 11 sectors reported a contraction. Due to manufacturing weakness, the Fed needs to cut its key interest rates further.
October is a seasonally strong month, and November is even stronger, especially as Thanksgiving approaches. The holidays are a happy time of year, and that positive sentiment also tends to rub off on the stock market. Not only is the S&P 500 doing well, but the Russell 2000 and small-to-mid capitalization stocks are doing well because there is an institutional parade into more domestic stocks that are benefiting from a strong U.S. economy.
I am expecting 2026 to be like 1999, when I had multiple portfolios surge over 100%, so I am expecting a spectacular year. The breadth and power of the overall stock market are expected to expand, and many stocks are not overvalued. As evidence, my average large capitalization growth stock is trading at only 15 times forecasted earnings, but amazingly, my average small-to-mid capitalization growth stock is trading at barely 4 times forecasted earnings. So, I want you to ignore all the bearish naysayers, hang on, and enjoy the ride.