Wall Street eyes Washington standoff with stocks near records

NEW YORK – The US government shutdown tops investors’ agenda next week as markets head into the seasonally strong fourth quarter, with equities near record highs bracing for an earnings-season test later this month.

A deep partisan rift in Washington led to a federal government shutdown that risks delaying crucial economic data and could potentially muddy the Federal Reserve’s policy-easing outlook.

Few on Wall Street expect the Washington impasse to derail a rally that has lifted the S&P 500 by 14% to repeated record highs, but with little in the way of major data or earnings, the Capitol Hill drama is set to dominate investor focus.

“The shutdown and the potential reopening … that’s going to get almost all investor attention,” said Mark Hackett, chief market strategist at Nationwide.

Investors’ main worry is that the shutdown will suspend the flow of timely economic data.

Should the data drought last several weeks, it could cause confusion about the Fed’s monetary policy path, as the central bank will be without government data that helps guide its decisions. It also poses a possible drag on economic growth the longer it extends.

But for now, there is little reason to panic, investors said.

BULLS IN CHARGE

Despite some softness in labor data, the US economy has borne the onslaught of trade and tariff headlines well and corporate earnings have supported stocks’ march higher.

Analysts as of Thursday expected earnings from S&P 500 companies to increase 8.8% in the third quarter from a year ago, up from forecasts of 8.0% growth at the start of July, according to LSEG data.

“In my opinion, lack of data actually puts more burden of proof on bears than it does on bulls,” Hackett said.

Investors will get a taste of the upcoming earnings season, with Levi Strauss and Delta Air Lines set to report results on Thursday.

“The most likely scenario is the market’s just kind of calm … moving sideways during the shutdown,” Hackett said.

KEY Advisors Wealth Management CEO Eddie Ghabour, who sees the shutdown possibly stretching for two to four weeks, echoed the sentiment.

“If we’re right on the shutdown stretching out, if you get extra stimulus in the economy in the form of two more rate cuts, and then the government is back in business, you’re going to see a huge re-acceleration of growth in the economy and the equity markets,” Ghabour said.

Investors will get a read on what Fed policymakers were thinking when they cut rates in September when the minutes of that meeting are released on Wednesday.

SEASONALLY STRONG

For stock bulls, it helps that the just-started fourth quarter is historically the S&P 500’s strongest, with an average gain of about 2.9% and a high share of positive returns, according to LSEG data going back to 1928.

“Despite headline risks and the potential for short-term volatility, the weight of the evidence continues to support a constructive stance,” Keith Lerner, co-chief investment officer at Truist Advisory Services, said in a note on Thursday.

“As always, we will continue to follow the weight of the evidence.”

Meanwhile, the market’s strong momentum has stock bears in hibernation. The S&P 500 logged its 30th record closing high of the year on Thursday.

“The shutdown is going to be the news, but I think the underlying backdrop is really three things, seasonality, which is positive, the tailwind of rate cuts to protect the labor market … and we have momentum in the markets,” said Sonu Varghese, global macro strategist at Carson Group.

“We’ve been overweight equities and we are continuing to be that,” he said.

(Reporting by Saqib Iqbal Ahmed; Additional reporting by Laura Matthews; Editing by Alden Bentley and Jamie Freed)