Fall is in the Air, but the Market Keeps Rising

This month’s front-page topic is the government shutdown. By a wide margin, the most frequent question from clients and advisors is why isn’t the stock market reacting negatively to the shutdown.

Historically, shutdowns have had limited lasting impact on the economy or markets. Stocks often recover quickly if they experience shutdown-related volatility. Shutdowns are disruptive but rarely disastrous.

Chart 1, 0:40— Mandatory spending such as Social Security and Medicare continues, while Treasury interest payments go out as usual. The main drag comes from furloughed workers, delayed government contracts and missing economic data. The rule of thumb is that each week of shutdown shaves about 0.1-0.2 percentage point from GDP growth, which is typically reversed once the government reopens. In other words, markets often look past the noise.

Chart 2, 1:121— In fact, in most shutdowns since the 1980s, stocks have risen during or shortly after the episode. Investors often view the dip in confidence as temporary, setting the stage for a relief rally once the impasse ends.

Shutdowns may generate short-term volatility, especially if jobs and inflation reports are delayed. But history shows markets tend to recover quickly, often rallying into year-end once the uncertainty clears. This is not the first shutdown—and it likely won’t be the last. From our perspective, what matters most are the fundamentals.

Even if the shutdown delays government data, the underlying trends point to a cooling but still stable economy. These fundamentals are what ultimately drive market performance, rather than the political drama. Markets have become less sensitive to unexpected policy announcements.

Let’s review some fundamentals: Growth has proven more resilient than many expected, and the near-term GDP growth outlook has improved despite elevated uncertainty. Corporate profits for the year continue to exceed forecasts, and corporate margins remain high.

Inflation pressure has arrived based on the administration’s tariff policy, but inflation continues to moderate. The Fed may cut rates further one or two times before year-end, which may be a tailwind for stocks. Ten-year Treasury yields are likely to be stable but lean modestly lower in the near term. The labor market, while softening at the edges, remains intact. Government stimulus through deregulation and tax policy is expected in early 2026. Let’s add to this a seasonal technical measure.

Chart 3, 3:02— Historically, the S&P 500 has done well in the 4Q of years where there was an earlier 10% or more correction, followed by a market rally to post 10%+ gains YTD. 2025 clearly fits this paradigm. We had an almost 20% pullback peak to trough in early April (remember Liberation Day?), and as of filming, the S&P 500 is sitting at a little more than 15% YTD.

Supportive fundamentals, momentum, and a historical technical bode well for the markets to finish 2025 favorably.

A few comments as we approach the end of the calendar year for clients with taxable portfolios. Now that it’s the 4Q, we are reassessing where taxable accounts stand on realized capital gains. We advise clients to be prepared for capital gains taxes. The S&P 500 has doubled in the past five years. Generally, there are not many, if any, losses to offset realized gains. 

Further, given many factors ranging from tariffs to anticipated deregulation to a shift in monetary policy, just to name a few, we anticipate some changes in our sector, industry, and individual stock allocations. This may be due to a changing environment or simply a stock that has run and we think profits should be realized or rebalancing of portfolio risk characteristics after the strong market run.

We can at times defer taxes and minimize the bill in a specific calendar year, but eventually, if you have gains, the tax man cometh. As always, a timely discussion topic when you next speak with your portfolio manager.