The Daily Breakdown: Q4 Starts With a Government Shutdown

We’re starting off the fourth quarter with a government shutdown, but will investors care? The Daily Breakdown looks into past instances.

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What’s Happening?

The US government shutdown began at midnight — the first since December 2018, which lasted five weeks and was the longest in US history. Lawmakers failed to reach a bipartisan spending deal, with the main sticking point centered on health-care tax credits.

Essential services like federal courts, TSA, and the Post Office remain open, but other departments will close and hundreds of thousands of federal workers will be furloughed. Another disruption? Economic data. The monthly jobs report, due Friday, will likely be delayed, as the Bureau of Labor Statistics is now closed. The shutdown also affects the weekly jobless claims report and, if prolonged, could delay inflation data — a concern for both the Fed and investors.

How Shutdowns Impact Markets

Despite the noise, shutdowns tend to have limited impact on markets. Investors have largely learned to tune them out, viewing them as short-term political posturing. According to Truist, there have been 20 shutdowns since 1976. During those periods, the S&P 500 was up 10 times, down 9, and flat once — all of which boiled down to an average move of…0%.

Looking at the data, the S&P 500 averages a 0.1% dip the week before a shutdown and gains 0.6% the week after. 

Is This Time Different?

Fundamentals — like earnings growth — still drive the market, but timing and sentiment matter. 

The S&P 500 has gained for five straight months, rising almost 40% from its April low, while the Nasdaq 100 has gained in six straight months and rallied almost 50%. Markets powered through the seasonally weak August-September stretch and, economically speaking, we could be flying blind at a time where the labor market is weakening and the Fed needs every bit of economic data it can to make its interest rate decisions. 

There’s never a good time for a shutdown but right now is really not a good time. Will that take some wind out of the market’s sails?

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The Setup — S&P 500 ETF 

Notice how well the SPY ETF has traded in recent months, with recent support coming into play near the $654 level and the rising 21-day moving average. These are short-term support levels that bullish traders will likely focus on if stocks begin to pull back.  

However, if the selling pressure picks up, it could put the 50-day moving average (in red) in play. That would require a dip of about 3% to get there. Should we see something a little larger — like a 5% pullback — that would put mid $630s in play. 

Beyond that — something like a 5% to 10% pullback — and some larger support zones could materialize, but we’ll focus on that only if we start to get a larger correction. 

Options

If SPY is going to remain in an uptrend, bulls will want to see these measures hold as support. 

For options traders, calls or bull call spreads could be one way to speculate on support holding on a pullback. In this scenario, buyers of calls or call spreads limit their risk to the price paid for the calls or call spreads, while trying to capitalize on a bounce in the SPY.

Conversely, investors who expect support to fail could speculate with puts or put spreads. 

For those looking to learn more about options, consider visiting the eToro Academy.

What Wall Street’s Watching

BTC

After holding a key support area, Bitcoin is on the rise this morning, up over 2% and the $116K level. Bulls are keeping a close eye on the $118K area, which is near where the September high comes into play. Above this level and bulls may start rooting for BTC to revisit $120K and beyond. Check out the charts for BTC. 

NKE

Shares of Nike are rising this morning after the company beat on earnings and revenue expectations for its fiscal Q1. Revenue rose slightly last quarter, up 1%, but Nike’s turnaround efforts showed promise after management had previously guided to a mid-single digit percentage decline in revenue. Dig into the fundamentals for NKE.

Disclaimer:

Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.