Fixed Income & Equities Markets Week in Review

Stocks rallied nicely this week, as the historically challenging month of September came to a close. According to CFRA, since 1945 the month of September has generated an average return of -0.6%, making it the worst month for performance. It has also tended to be among the more volatile months historically. However, this year’s month of September defied the historic pattern and the major domestic indices posted notable gains: Dow Jones Industrial Average (Dow) +2.0%, S&P 500 +3.6%, Nasdaq Composite +5.7%, Russell Mid Cap Index +0.9%, and Russell 2000 +3.1%.

September’s positive performance added on to the strong rally that has been in place since early April. As of September 30th, these indices all achieved positive double-digit year-to-date gains: Dow +10.5%, S&P 500 +14.8%, Nasdaq Composite +17.9%, Russell Mid Cap Index +10.4%, and Russell 2000 +10.4%. The painful drawdown that occurred between mid-February and early April has now been significantly offset by this six-month rally. Of note, the S&P 500 has now achieved five straight monthly gains and the Nasdaq Composite has posted six consecutive months of gains.

News from corporate America was pretty quiet this week, as most companies are now in the “quiet period” leading into the end of the 3rd quarter and the upcoming earnings season. Updates on economic data also became quiet this week when political gamesmanship in Washington D.C. led to a government shutdown on Wednesday and the Federal spending authority expired. For the time being, the stock market mostly shrugged off the shutdown event. That could change if the shutdown lengthens and the White House moves ahead with the threatened mass firings of government employees and if the market is not able to examine economic data. Market participants are anticipating that there could be another 0.50% in interest rate cuts this year. But, the Federal Reserve (Fed) has made it quite clear that the path toward lower interest rates is data dependent. Thus, the government shutdown needs to end so that data can be examined.

Looking into the past, government shutdowns have been more of a headline event than a bottom-line impact. Of the 21 shutdowns since 1976, the effect was felt more on Main Street than Wall Street. While the S&P 500 rose marginally since 1976 during these periods, 30 days after the end of the shutdown the S&P 500 was higher 71% of the time. Finally, during the longest shutdown period (December 22, 2018 through January 25, 2019) the S&P 500 gained 10.3% during the entire 35-day stretch and advanced an additional 4.8% in the 30 days after the shutdown ended. But, the market does need to see the Fed digest inflation and employment data that will enable them to make decisions on whether to continue cutting interest rates.