Wentz Weekly: Stocks Higher Despite Government Shutdown

Wentz Weekly Insights
Government Shutdown and Its Impacts

US stocks were higher last week, recovering the losses from the week prior, with the S&P 500, Dow, and Nasdaq all reaching new records. The gains were broad based, with the equally weighted S&P 500 performing in line with the other four major US indices, rising 1.42% over the week. Outperformers included pharmaceuticals from the Trump announcement with Pfizer, technology from the continued momentum in AI and CoreWeave/Meta deal, and utilities. Underperforming was energy as oil fell over 7% on the week.

The month and quarter ended Tuesday with the S&P 500 seeing a 3.53% increase in September, the fifth consecutive monthly increase. For the quarter, the index rose 7.79% and saw 23 new record highs over the three-month period, the most in a single quarter since Q1 1998. The Russell 2000, an index of small cap companies, outperformed with a gain of 12.0%.

The Treasury market was positive last week after seeing the yield curve steepen despite additional Fed speak that saw several more Fed members voice support for patience when it comes to cutting interest rates. Almost all speeches involved the fact that risks to employment are tilted to the downside while risks to inflation are to the upside. However, more policymakers have voiced opinions that employment is still steady while inflation still is not low enough, a view that supports higher rates.

The focus last week was on the government shutdown that took place when the government’s new fiscal year started October 1. Congress must pass a budget by October 1 each year to fund federal agencies. When lawmakers fail to agree on a new budget, a shutdown can occur. A “continuing resolution” is often used to buy time while lawmakers negotiate.

Last week a seven-week stopgap was proposed by Republicans but failed to pass. While Republicans pushed for a “clean” continuing resolution, Democrats wished to include an extension to Affordable Care Act subsidies that are set to expire January 1. President Trump suggested these issued could be discussed, but not part of the stopgap.

Government shutdowns have historically turned out to be short term issues. The last shutdown occurred seven years ago and was the longest shutdown at 34 days. Since 1978 the average shutdown has lasted eight days. However, with such a significant divide in Congress currently, the risks of a longer shutdown are higher. The longer a shutdown happens the more likely it is to affect GDP/economic growth and the markets, which would likely lead to higher volatility.

There are an estimated 750,000 federal workers that are now furloughed, who will not be paid until the government passes a budget and reopens. That equals an estimated $400 million in lost income per day. The Congressional Budget Office estimated that the 2018 shutdown subtracted 0.3% from GDP, with some of that being permanently lost and some made up in future quarters when it reopened.

The other issue is since many of the government agencies are closed, the collection and reporting of key economic data reports are being delayed. This complicates the Federal Reserve and monetary policy since it relies on much of this data to make its policy decisions, including the monthly labor market numbers that were scheduled to be released last Friday but are now delayed. A longer shutdown means less economic data and a more difficult job for the Fed at a time when markets are laser focused on the number and pace of rate cuts.

On the other hand, the momentum in artificial intelligence, and semiconductors and technology as a whole, continued last week. The most notable move was from CoreWeave and Meta, who signed a deal where CoreWeave will supply computing power to Meta in a $14 billion partnership. This will give Meta access to CoreWeave’s data centers and the most advanced AI chips from Nvidia, the GB300 super chip. CoreWeave is a specialized cloud computing company that focuses on GPU-based infrastructure, providing access (renting out) to massive and powerful data centers that hold the most advanced GPUs (graphic processing units) to companies that do not have the capital to build their own.

This week there is a lull in events, with very little data scheduled (which may be delayed), and only a handful of earnings reports. The focus will continue to be on Congress and its ability to pass a stopgap bill and the Federal Reserve with Chairman Powell’s speech on Thursday in focus, before things pick up next week with inflation data and the start to Q3 earnings season.

Week in Review:

It was another positive week for stocks, driven by momentum in AI/technology, but the upside was broad-based with the equally weighted S&P 500 rising 1.42%. Volatility rose from its low levels with the volatility index up 8.89%. The four major US indices finished as follows: Russell 2000 +1.72%, Nasdaq +1.32%, Dow +1.10%, and S&P 500 +1.09%. Treasuries were firmer with yields moving lower across the curve – the 2-year Treasury yield fell 7 basis points to 3.57% while the 10-year yield fell 6 basis points to 4.12%. The dollar index fell 0.44% while gold continued its impressive run, rising another 2.79% to new all-time highs. Bitcoin increased 11.44%. Oil fell 7.36% as report suggested OPEC was looking at higher production increases.

Recent Economic Data

• Employment Report: Delayed

• ADP Payrolls: Payroll data from ADP showed private sector employment fell by 32,000 in September, the third decline in the past four months (after last month’s 54,000 payroll increase was revised down to a 3,000 decline in payrolls). Payrolls are still up 1.153 million over the past year, however that is the lowest annual increase since the pandemic declines in 2020-2021.

• Job Openings and Labor Turnover Survey: The number of job openings on the last day in August was 7.227 million, relatively unchanged from July’s level and down about 420,000 from a year earlier. The number of hires has been relatively stable the past year in the low 5 million range along with the number of separations, staying in the same range, indicating a labor market that continues to tread water. Among separations (at 5.111 million), the number of quits fell about 80,000 from last month and a year ago, while the number of layoffs was 1.725 million, down from last month but up slightly from last year.

• Jobless Claims: Delayed

• Case Shiller Home Price Index: Home prices continue to slow, according to the Case Shiller home price index. The index showed home prices fell 0.2% in July, following a 0.3% decline in both June and May. All 20 major cities track saw a decline in home prices in July except for the Midwest cities. On a year-over-year basis, the national average for home prices increased 1.7%, slowing from the 1.9% annual increase seen in the month prior for the slowest pace since 2023. Cities in the South and West saw prices decline compared to a year ago while New York City, Chicago, and Cleveland saw the largest price increases at 6.4%, 6.2%, and 4.5%.

• PMI Manufacturing Index: The PMI Manufacturing index for September was 52.0, slightly down from 53.0 from August, indicating a moderate increase in manufacturing activity in the month. Production and new order growth slowed as tariffs continued to weigh on exports. Tariffs and policy uncertainty also weighed on firms’ business outlook and also continued to push input prices higher.

• ISM Manufacturing Index: The ISM manufacturing index for September was 49.1, a little lower than consensus and up slightly from August reading of 48.7, indicating manufacturing conditions continued to decline in the month (a reading below 50 reflects contracting conditions). New orders fell into negative territory while production rose to a slight increase. Employment continued to decline, but at a lower rate, while prices continue to increase, but at a slower rate. Comments noted continued impacts from tariffs, with some noting weak demand with customers delaying or cancelling orders.

• Factory Orders: Delayed

• ISM Services index: The ISM services index, an activity index based on a survey in the services sector, was 50.0 for September, indicating activity was basically unchanged in the month. The report noted business activity was slightly negative for the first time since 2020 while employment declined and price increases continue to be elevated.

• Construction Spending: Delayed

• Consumer Confidence: Consumer confidence deteriorated again in September according to the Conference Board’s monthly survey. The index was 94.2, down 3.6 points from 97.8 in August, the lowest level since April when the economy/markets were hit with the tariff announcements. The present situations index fell 7.0 points to 125.4 while the expectations index fell 1.3 points to 73.4, remaining under the threshold of 80 that typically signals a recession ahead since February.

Company News

• OpenAI: Wired reported that OpenAI is planning to launch a new social media app that would challenge TikTok and similar apps like Threads and YouTube Shorts where it will create artificial intelligence generated videos. It would be called Sora 2 and would work similar to TikTok where it will have a vertical video feed with a recommended algorithm. Instead of relying on user’s video uploads however, a user’s identity and likeness are verified and can be used in the AI-generated videos.

• Pfizer: Pfizer shares were higher last week after it was reported the company agreed on a drug pricing deal with the Trump Administration and will avoid tariffs on its drug imports. The company agreed to implement measures to ensure Americans receive comparable drug prices to those in other countries, will participate in the direct purchasing platform TrumpRx.gov that allows customers to buy drugs at a discount, and to provide drugs to the Medicaid program at a lower price. In addition, Pfizer said it agreed to a $70 billion investment on manufacturing medications in the US. CNBC is reporting that Eli Lilly is currently in talks to make a similar deal.

• AppLovin: Shares of AppLovin were up over 5% to start last week after it said it will launch a new self-serve tool for non-gaming advertisers on October 1 that will allow e-commerce client to join its Ads Manager platform without manual onboarding, a move that is expected to be the next catalyst to growth as it is expected to grow its customer base, including internationally.

• Coreweave: Coreweave announced it agreed to a $14.2 billion deal with Meta (parent company of Facebook) where it will provide computing power including providing Meta with access to its data centers that hold Nvidia’s latest and most advanced GB300 chips.

• Meta: Meta said its apps like Facebook and Instagram will begin utilizing data from user interactions made with its artificial intelligence services to show more personalized content and more relevant and personalized ad recommendations for those users which it says will improve people’s experience.

• Electronic Arts: After several reports two Fridays ago, video game publishing company Electronic Arts said it has agreed to go private in the biggest leveraged buyout deal in history. The deal values EA at $55 billion and will be led by several private equity firms including Silver Lake, Saudi Arabia’s Public Investment Fund (PIF), and Affinity Partners. This deal is about a 25% premium to where shares traded prior to the initial reports Friday.

• Target: A Fox Business report said Target is being considered as a possible takeover target by a private equity firm, sending its shares higher. It said the rumors began in May but gained traction after the recent CEO replacement and better than expected quarterly results in its most recent quarter, while the stock has remained stagnant creating what they called an attractive takeover price.

• Corteva: The agricultural company, focusing on seed and crop protection, Corteva, previously spun off from DowDuPont in 2019, announced its plans to split into two industry-leading public companies. One will be the new Corteva that will be focused on and lead its crop protection solutions including biologicals, while the other company will be named SpinCo and focus on advanced seed genetics including its flagship Pioneer brand. The spinoff will be a tax-free transaction for shareholders. 

• Boeing: The Wall Street Journal reported Boeing is planning a new single-aisle airplane that would succeed its troubled 737 MAX plane. Sources familiar with the matter say Boeing is still in the early stage developments of the new aircraft but has been designing the flight deck and has met with officials from Rolls-Royce where they discussed a new engine for the plane.

• Tesla: Tesla said it delivered 497,100 vehicles in the third quarter, a record quarter for the company, more than the 448,000 expected, and well above 384,100 vehicles from the second quarter. It saw a surge in deliveries as customers took advantage of the $7,500 tax credit before it ended on September 30.

Other News:

• Drug Prices: After several months of drafting a proposal for lowering drug prices for Americans, the Trump Administration took the first steps last week by introducing a new platform that would allow consumers to purchase discounted medications directly from manufacturers on a government sponsored website TrumpRx.gov. Pfizer was the first to agree to join the platform. it also agreed to other things with the administration including to implement measures to ensure Americans receive comparable drug prices to those in other countries and to provide drugs to the Medicaid program at a lower price. In addition, Pfizer said it agreed to a $70 billion investment on manufacturing medications in the US. CNBC is reporting that Eli Lilly is currently in talks to make a similar deal.

• Pentagon Calls to Increase Missile Production: Defense stocks were higher last week after a Wall Street Journal report said the Pentagon is urging missile suppliers to double or even quadruple production rates on a breakneck schedule. The report says the Pentagon is worried about the low weapons stockpile the US would have on hand for a potential future conflict with China. It adds the push to speed up production happened after a series of higher level meetings with missile makers with some calls taking place weekly to discuss.

• Fed Governor Cook: The Supreme Court said it will not allow Trump to immediately fire Fed Governor Lisa Cook, and she can continue to serve her role at least until it listens to oral argument on whether Trump has the legal cause to fire her, which will take place in January.

• OPEC to Increase Production: A Reuters report said OPEC is expected to raise output targets again at its next meeting October 5, considering a 137,000 barrels/day increase (versus the world supply of about 100 million bbl/day). Oil prices have moved a little higher lately despite the roughly 1.7 million bbl/day supply increase by OPEC so far this year as a supply gut has not played out as expected. New reports say it is discussing an even larger 500k bbl/day increase. During its meeting on Sunday, OPEC+ agreed to increase production 137,000 bbl/day as the Reuters report suggested, a more modest increase than the highest rumors. The group will meet again November 2 to discuss quotas again.

• New Tariffs: Trump announced several new tariffs last week including: 100% tariff on branded and patented pharmaceutical drugs with an exemption if the company is actively building new manufacturing in the US, 50% tariff on kitchen cabinets and bathroom vanities, 25% tariff on heavy trucks, 30% tariff on upholstered furniture, and 10% tariff on imported lumber and timber.