Post Shutdown Blues
It is not a fait accompli at this point in every way, but, the shutdown has now arrived at its inevitable end. The shutdown kept me thinking of a blues song. In cut time I was singing: We’ve got the old shutdown, those old shutdown blues. This is appropriate to ponder on a day that the bond market is closed.
What was accomplished by both sides? It is not clear that anything in particular was attained other than a dose of anger on the part of the public. We all have gathered anecdotes from this period. One of the best that I heard in my circles is that what should have been a three hour trip from EWR (Newark Liberty) to Florida turned into a twelve hour odyssey. The only saving grace is that it was not a business trip.
At least, critical federal workers are being called back. Restoring SNAP payments is a positive. The estimated effect on GDP during the quarter is estimated at less than 0.5% by pundits. But the disruptive quality of the experience has been palpable.
As for extending ACA subsidies that is scheduled for debate in December, many already are declaring that such a move is D.O.A. before one word has been uttered. Let’s not forget that Medicaid is destined for major changes due to the One Big Beautiful Bill. Emergency rooms will be overwhelmed once again.
The other blues induced aspect of all of this activity is that we get to repeat it in January once again. At least the holidays will not be a total bust but tariffs will provide some consternation. Retail sales activity at this time of year is critical for the economy and most important to sales tax yields for the states. A mid single digit growth rate for retail sales is in the probable range.
The data black out is also causing some disruption. Interpreting all of the delayed releases when they are made will be an important input for the next Fed meeting. It is very challenging to call the future Fed action in this void. The Fed will be quite cautious and may not take any action.
Earnings continue to be quite strong. AI is a focus of a good deal of the upside in the market. Japanese investors have been reported to be selling their AI investments to be able to redeploy the proceeds elsewhere. The question is whether US investors will follow suit. Capital gains is an important swing revenue source in high tax states including CA, NY, MA and several others.
At this point in the year, it is easy to see that volume in the municipal market will amount to a record by year’s end. Predictions for next year are now taking shape. Most are calling for a modest decline in volume. It is reasonable to conclude that the volume this year will be taking some of the action away from next year. The January effect could be quite strong next year as the Congress is contemplating the budget once again.
Rates have accelerated once again with the ten year at 4.12%. As some of the current forces at work moderate, I would expect that rates will decline marginally once again.
The recent election results have demonstrated that the two party system continues to be a factor. There is quite a long way to go before the midterms. More critical is that those elected will need to put their budget recommendations together in short order. There will need to be a strong dose of reality introduced in forming spending policies. Budgets at the state and local level still need to demonstrate balance. The pressure that New Orleans is experiencing currently has the possibility of forming in other jurisdictions. Diligence is necessary in the approaches to the budget process.
As volatility in markets increases, the appeal of fixed income becomes more appealing. Positive flows to the funds and the ETFs are indicative of this trend.
Best to all veterans on this day of remembrance. We are grateful.
John Hallacy
John Hallacy Consulting LLC
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