Government Shutdown. Markets Play Through
*Use the data, not the drama. Seasonality and rate cuts may fuel year four of the bull market.
If you sold a business, received a windfall, or just retired with a rollover, put that money to work with a disciplined, diversified portfolio tied to your financial plan and goals. Don’t let shutdown headlines stall your allocation. Shutdowns, politics, war, hurricanes and world events make great TV, but poor strategy.
October often begins a stronger seasonal stretch that runs through spring. With the policy rate already moving lower and earnings still positive, your edge is staying allocated, broadly diversified, and tax-aware rather than timing headlines.
Over the past 50 years, Washington has shut down 21 times. The average stoppage lasted about eight days. Markets usually shrugged, with the S&P 500 trading flat or slightly higher during those periods according to Dow Jones Market Data. This indicates that stocks look forward past current events, wars and politics. If shutdowns are noise, seasonality is signal. The calendar has historically mattered more than politics.
Seasonal Trends (Weather Conditions)
Historical data indicates that the S&P 500 has exhibited stronger performance from October through May compared to the summer months. Since 1950, the index has averaged approximately a 7% return during the October – May period, while the May – October stretch has yielded less than 2% on average according to Schwab research.
Notably, November and December have been particularly robust months, often culminating in the “Santa Claus Rally,” a phenomenon where stocks tend to rise during the last five trading days of December and the first two of January, with an average 1.3% S&P 500 gain since 1950 (LPL Financial). Additionally, the “January Effect,” where stocks, especially small-cap ones, often perform well, has been observed, though its significance has varied over time.
While we don’t promote investing based on maxims or trends these seasonal patterns underscore the importance of long-term investing and the benefits of maintaining patience throughout the year rather than succumbing to short-term market timing. At times, leaning with the crowd has delivered more than fighting it.
With many tech names trading at stretched valuations and tariffs adding pressure, maintaining a strategic yet tactical portfolio is key. We continue trimming stretched mega-cap growth on strength and adding to underpriced value and quality in other non-tech sectors (referred to as the S&P 493) buoyed with core bonds, TIPS, alternatives, and international holdings.
Fed Funds Rate (Stay in the Game)
The Fed funds rate now sits at 4% to 4.25% after the September cut. If the economy holds steady and inflation continues to ease, the Fed’s own dot plot suggests two more quarter-point cuts by year-end, bringing the range down to 3.50 to 3.75%. Another two cuts in 2026 would take it closer to 3% to 3.25%. (trading economics)
That is the roadmap if all the lights turn green. Markets are pricing in something similar but with more caution, since sticky inflation from tariffs or strong growth could slow the pace. Either way, the message is clear. Leaving too much in cash risks falling behind inflation and taxes over time, especially if you locked in just a 3% return.
Predictions vs Reality
Economists and pundits have been calling for a recession almost every year since the 2020 pandemic crash. They’ve been wrong every time. In 2023, 85% of economists predicted a downturn. It never came.
Research from Berkeley Haas shows top forecasters are right only 23% of the time – about the same as guessing. The St. Louis Fed notes recessions are rarely called in advance with accuracy, even though headlines make them sound inevitable. Markets respond to actual data, not predictions.
“Our strategy is to follow the data and trends, not the media. That means running disciplined globally diversified, “all weather” portfolios with ongoing oversight to help minimize volatility for our clients while providing a smoother ride to get to the same destination. A strong defense is often the best offense to help clients sleep better at night.”
Odds Are in Your Favor
The odds of investing successfully in the stock market are far better than most risks people worry about. The odds of being bitten by a shark or ending up in a plane crash are one in 11 million. Lightning strikes? One in 15,000. A car crash? One in 8,000. The odds are low for many of these events, yet recency bias makes every dip in the ocean to a market dip feel catastrophic if you read about it in the news.
The reality is that if you hold a diversified portfolio, the odds are stacked in your favor. There have been very few four- or five-year periods when a balanced portfolio or the S&P 500 lost money. Patience and broad exposure still beat fear almost every time. (see chart)
Q4 Market Update: Playing Though New Highs
Volatility is part of investing, and this year has been no exception. Tariff-driven selloffs through April’s “Liberation Day” have made headlines, but they also created opportunities to buy at better valuations. On the flip side, when markets recover and climb to new highs, some investors feel uneasy even when fundamentals remain sound. Both situations show the value of holding portfolios that can weather the full market cycle while keeping long-term goals in focus.
As we start the fourth quarter, investors are facing mixed signals further fueled by the Government Shutdown. The S&P 500 hit new highs in the third quarter, supported by strong corporate earnings and enthusiasm for artificial intelligence. At the same time, inflation has been creeping up, stock prices are elevated like 1999, and the labor market has weakened since summer, raising concerns about the health of consumers. Yet GDP growth has been solid helping to keep stocks buoyant.
Valuations Push to the Sky
For long-term investors, valuations matter more than headlines. Prices alone don’t tell you much. Valuations show what you are paying for each dollar of earnings, cash flow, sales, or dividends. When valuations climb, it signals optimism, but it also raises the bar for what companies must deliver.
The Shiller price-to-earnings ratio makes the point. At roughly 38 times earnings, the S&P 500 now sits well above its 35-year average of 27. That is territory not seen since the dot-com bubble. (see chart) Unlike the standard P/E, the Shiller ratio smooths the noise by using ten years of inflation-adjusted earnings. The result is a more sober view of how stretched markets have become.
Valuations at these levels are not shocking given the rebound of the past two quarters. Since April 8, the S&P 500 has surged 34%, driving a double-digit gain for the year. Tech stocks have once again set the pace, leading on the way up just as they did on the way down. The so-called Magnificent 7 are up 61% from the bottom. Investors may debate whether corporate spending on artificial intelligence will pay off, but it has clearly fueled both market gains and business investment.
( Club versatility) Valuations, however, are not crystal balls. They do not predict short-term market moves or serve as timing tools. What they do provide is context for asset allocation. While large-cap growth stocks look expensive, other areas such as small-caps, value, financials, healthcare and international markets appear far more reasonable. For investors with patience and a wider lens, those segments offer opportunities that may be overlooked in today’s headline-driven market.
Fed Cuts, Jobs Weaken
What makes this cycle unusual is the backdrop. Historically, the Fed cuts only when the economy is sliding into crisis or recession. Today, growth is still solid. This round of easing is more about normalization after the fastest tightening campaign in decades. It is a rare instance of the Fed cutting while the economy is expanding and stocks are trading at record highs.
Perhaps the most important factor driving the Fed’s decision has been the deterioration in the job market. While the unemployment rate of 4.3% remains low by historical standards, the pace of job creation has slowed dramatically. August saw only 22,000 new payrolls added, well below the average of 123,000 from earlier in the year.
Even more striking are the payroll revisions suggesting that 911,000 fewer jobs were created over the twelve months through March than originally reported, as shown in the chart above. The Bureau of Labor Statistics revises the payroll numbers each year based on more accurate data than was available at the time of each monthly jobs report. While the numbers are still preliminary, a revision of this magnitude would represent the largest in history, showing that the job market has been weaker than originally believed.
Thus, the Fed is cutting rates because, according to the latest FOMC statement, it “judges that downside risks to employment have risen.” For investors, rate cuts typically provide support for both stocks and bonds if the economy remains strong.
Market volatility is Low for Now
After significant volatility driven by tariffs and taxes earlier this year, measures of economic policy uncertainty have improved. The VIX index of stock market volatility is hovering around 16.3, below the long run average of 18, while the MOVE index of bond market volatility has declined to 78, below the average of 87. (FRED)
Markets can shift from calm to chaos quickly. In just the past few years investors have faced inflation spikes, tariff fights, Fed policy swings, recession calls, and geopolitical shocks. A government shutdown is only the latest headline, and like many before it, the long-term impact is likely to be small. Tariffs and inflation are still wild cards, but uncertainty is the constant.
That uncertainty is also what drives returns. The gap between what investors feared and how markets actually performed in recent years is striking. Fear said recession, but markets delivered gains. Volatility is not something to avoid, it is the price of admission for long-term growth.
The bottom line? With overheated mega-cap tech valuations, mild re-inflation, lower rates, and a weakening dollar, look for pockets of opportunity and don’t end up in a sand trap.
As we enter the final quarter, stocks are near all-time highs even as the economic picture sends mixed signals and fears evolve from the recent government shutdown. This is exactly the kind of backdrop that reinforces the value of staying diversified, disciplined, and focused on long-term goals rather than reacting to every headline.
For more information on our firm or to request a complimentary investment and retirement check-up, call (561) 210-7887 or email jon.ulin@ulinwealth.com.
Author: Jon Ulin, CFP® is the founder and Managing Principal of Ulin & Co. Wealth Management, an independent advisory firm based in Boca Raton, South Florida for over 20 years. As a fiduciary wealth advisor, Jon helps successful individuals, families, and business owners nationwide with multi-generational planning, investment management, and retirement strategies. Learn more about Jon and our team at About/CV.
Note: Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Information provided on tax and estate planning is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
