Investment Review №330. Profit favors the bold

October 1 marked the 21st government shutdown since 1970, after Republicans and Democrats failed to reach a funding agreement. Federal agencies responsible for critical economic metrics like employment statistics, Consumer Price Indices, and GDP reports have ceased their work. Now, investors have only private sector labor market indicators and corporate earnings to rely on in assessing economic health. This data void aggravates existing uncertainties, as the market attempts to measure both short-term operational disruptions and longer-term fiscal policy outcomes. As a result, there is a heightened risk that the Fed will have to make its rate decision on October 29 without macroeconomic data.

The rising uncertainty may deter investors from making calculated decisions. However, it is always prudent to base decisions on facts and conduct a thorough assessment of market trends. Since 1976, the S&P 500 has typically remained stable during government shutdowns, which average eight days in duration, showing average gains of 1.2% and 2.9% in the subsequent one and three months, respectively. Moreover, over the record 35-day shutdown during President Trump’s first term from December 2018 to January 2019, the three major Wall Street indices rose by 11-13%. Despite the notable 20% sell-off from local highs during that period and the low base effect, there was a persistent positive sentiment, which is a critical point.

Regarding the current government shutdown, market projections estimate a duration of 17 days (Source: Polymarket), which excludes a severe impact on the market. Even if the shutdown lasts 35 days or longer, the Fed may respond by cutting the rate as a “risk management” measure, as it did in September, effectively aligning with Donald Trump’s strategy. This should support the market, including not only the Magnificent Eight but also risk assets such as fast-growing unprofitable companies, small caps, firms undergoing initial public offerings, etc. It is also essential to note that the VIX fear index remains below 17 points, indicating a lack of significant risks predicted by investors.

In conclusion, the primary recommendation is to be in the market and consider increasing exposure, as the fourth quarter is typically the best quarter for returns. Investors concerned about volatility may buy hedges on the broad market (ETF – SPY); those who have heavily invested in technology – on the QQQ ETF, which tracks the 100 largest tech companies. Another asset worth considering for its calming effect is gold. In April, I set a target of $4,000 per ounce, a figure we are very close to. A survey by the World Gold Council reveals that 95% of respondents anticipate an increase in global central bank gold holdings over the next year, which will drive demand from both institutional and retail investors. The demand is particularly rising among Asian investors, with significant trading increases over the past two quarters and a narrowing bid-ask spread for gold futures, suggesting substantial interest. Consequently, I suppose that gold may reach $4,400 per ounce in the next 12 months. However, if the proportion of gold in your portfolio approaches or exceeds 10%, it would be wise to reduce it to 2-5% to secure gains from this exceptional rally.