And now a government shutdown…

And now we can add a government shutdown to the list of challenges and risks.  In recent conversations, I’ve heard many describe growing fears of a market meltdown.  Might this shutdown be the catalyst to bring on the turbulence they fear and expect?  Probably not – there may be a different way to look at it.

Could the Shutdowns Bring a Full On Crash?
While anything is possible, the most negative economic narratives seem overwrought.  With so many dramatic and concerning headlines, the thinking goes: it’s only a matter of time before the stock market falls to match the awful sentiment felt by large groups of citizens. 

But there are problems with this view.  As awful as many citizens may currently feel about societal trends they perceive around them, many others are pleased as policies they support are finally enacted.  And the cold hard reality of markets is that sentiment alone doesn’t drive markets; actions do. 

Take consumer spending.  The portions of the population that substantially impact overall consumption have not largely slowed their spending.  Yes, there are areas of concern, but so long as the American consumer (which is all of us) keeps spending, corporate earnings are likely to remain relatively strong. 

Let’s look at other current concerns:

Overvalued stocks.  It is often reported that the S&P 500 index is overvalued.  Valuations have never been a good metric for timing the market, meaning that high valuations might lead to lower long-term performance but are rarely useful as an immediate harbinger.   And yes, there are high valuations, especially in technology especially the “Magnificent Seven” (Nvidia, Google, Apple, Amazon, Netflix, Meta/Facebook, and Tesla).  But these are hugely successful companies that generate massive cash flows, so their high valuations are to some extent justifiable.  And if you remove the Magnificent Seven from the S&P 500, the valuations of the remaining 493 don’t look so overvalued.  In other words, valuations may not be as precarious as often reported.

Tariffs.  As I wrote in a prior essay, the worst fears about tariff policies have not been realized.  Yet, is the refrain often rolled out by those with bearish expectations.  Markets seem to be saying that the expected impact on growth and inflation may in fact be relatively muted.  Plus, the potential revenue raised from tariffs may contribute towards lowering the deficit.  And if markets are in theory forward looking, the recent runup would reflect expectations of economic growth not contraction.  

Banking stability.  Banks and the financial infrastructure seem solid.  In spite of drama around the Fed, the overall financial foundation of the US appears to have remained durable.  Reforms established after the Great Financial Crisis can seem excessive to industry insiders, but when major stresses have emerged in recent years, banks have held firm.  The importance of this cannot be overstated.

Stocks Take a Breather
A more optimistic or pragmatic read on what may happen to stocks is that they are due for a pause after very strong growth since April.  The funding fight in Washington may be the catalyst large enough to interrupt stocks’ strong momentum for a period of consolidation. 

But a pause isn’t a crash.  With the fundamental drivers of the economy intact, the longer term upward trends of the economy and stocks will likely prevail.  In addition to consumption spending and strong banks discussed above, you could add the positive impacts of technology trends.  The future enabled by AI among many other technologies, may well become reality.  The ultimate impact on productivity could be very positive for corporations and some analysts are seeing evidence of productivity growth already.

Finally, recent signs of slowing in areas such as the labor market could well be a positive rather than a negative indicator.  Many statistics about the labor market are backward looking (they state what already happened).  Called lagging indicators, such stats may mean that we’ve gone through a shallow slowdown already and the business cycle may be moving into a recovery phase. And if interest rates begin to ease, this could become a catalyst to growth and counterbalance to slowing labor market.

Signs of Concern Persist
I imagine that to many it can seem discordant to try and reconcile the strong market with evidence of disturbing struggle in many areas of society and the world.  Two ugly wars grind on in the Middle East and Europe, income disparity in the US is increasing, demographic change marches on as the US continues to get older, climate change evolves, the US reestablishes itself on the world stage to unknown consequences.

These concerns are real and may be reflected in prices of gold and volatility in the bond market.  If the market for stocks shows optimism, the outlook in other markets show traces of worry.  My own view is that these different actions indicate the fears and optimism of different constituent groups each making bets on the outcomes they envision.  Which is correct?  It may be that they all are correct, to an extent.  But not quite so much as they might expect.  And simultaneously they are all wrong as well.  My guess is that the actual future we are moving into will not be as grand or as dire as we can imagine.  The messy muddle through the middle could well be what we have in store for us.  In the end, we may certainly be due for a pause or a pullback, but probably not a crash.

Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC. 

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.  The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services (Source: U.S. Department of Labor).

The PCE price index, or Personal Consumption Expenditures price index, is a measure of the prices of goods and services purchased by people in the United States.