Shutdown Causes Volatility in The Stock Market

In November, domestic stock markets were unusually volatile.  Market action in the short period between November 12 and the month-end is a perfect example, with the S&P 500 index declining from 6,851 to 6,539 and then back again.  A major reason for the herky-jerky price patter was the lack of economic data caused by the recent government shutdown.  As we said last month, reports on jobs, inflation, and consumer spending are the lifeblood for investors, especially the professionals. 

Without these updates, uncertainty grew and traders reacted nervously to every hint from the Federal Reserve.  This made it harder to predict whether the Fed would cut interest rates at its December meeting.  Now that data reporting has resumed, investors are hoping for clearer signals in the moths ahead. 

Recent comments from Fed officials suggest they are leaning toward a rate cut.  San Francisco Fed President Mary Daly referred to the job market as “vulnerable, and New York Fed President John Williams said he thinks interest rates can fall “in the near term. “These statements, combined with a bit of fresh data, have pushed market expectations for a rate reduction to over 85%, up sharply form just a week ago.

Upcoming reports on business activity, consumer confident, and inflation will give investors a better picture of the economy.  The Fed’s preferred inflation gauge, the personal consumption expenditure index, will also be released soon.  While it covers September and may be outdated, it still matters because inflation is part of the Fed’s dual mandate and remains above target.  If these numbers show price pressures are under control, it will strengthen the case for easing. 

Looking ahead, the December Fed meeting could help bring the clarity markets have been seeking.  A rate cut would likely boost confidence and help continue to stabilize stocks after a shaky November.  Some analysts expect the Fed to lower rates by another half percentage point by the end of the first quarter of 2026.  If that happens, it will support stocks, and quality bonds could offer attractive returns.  For now, all eyes are on the data and the Fed.

Even though the S&P 500 is within shouting distance of its all-time high, it is not an easy time to be an investor.  Recent market volatility reflects extreme uncertainty.  The long-term outlook of the AI trade has been a big factor.  And economically, it’s there for all to see in the form of recent (but unfortunately stale) sales and labor data.

December is usually a good month for stocks and we feel this year will be no exception.  Markets are constantly moving.  If your too aggressive, you could suffer during a market downturn.  If your too conservative, inflation will gradually reduce your purchasing power.