Weebles wobble, markets tumble: Government shutdown sparks sell-off as Q4 begins

Jeopardy Category: – Classic Toy Slogans for $1000.

Q: ‘blank’ wobble, but they don’t fall down! Was the catchy 1970’s slogan for this Hasbro/Playskool toy?

A: What are Weeble’s!

The Weeble’s toy line was first introduced back in 1971 — those egg-shaped little figures with weighted bottoms. The beauty of the slogan — “Weeble’s wobble, but they don’t fall down” — was that no matter how hard you tipped them, they always popped back up.

And just like the Weeble’s, you can try to tip this market over… but it seems to always pop back up. (Until early this morning - but more on that in a minute). The pending gov’t shutdown (which everyone knew was happening) and the benign JOLTS report did little to cause anxiety for the markets on the final trading day of the 3rd qtr.

At the closing bell – the Dow tacked on 82 points, up 0.2%, to notch yet another all-time high to close out the qtr. The S&P climbed 18 points, up 0.3%, falling just 14 points short of its own record – so close you could taste it! The Nasdaq added 69 points, up 0.3%, still 128 points shy of a new high – not quite ‘Knocking on Heaven’s Door’. The Russell? It slipped 4 points, down 0.15%, while the Transports coughed up 55 points, off 0.35%. The Equal-Weight S&P pushed higher by 25 points, up 0.3%, leaving it just 18 points shy of a record, while the Mag 7? Only a 35-point gain, up just 0.10% – leaving it 322 points away from reclaiming its glory.

Now this morning – the tone is different (and that should surprise absolutely NO ONE).

At midnight plus 1 second (12:00:01) the gov’t shutdown after Republicans (think Vance, Thune, Johnson, Graham) and Democrats (think Chucky, Lizzy, Bernie all pressured by the squad) failed to find common ground to pass the CR to keep the gov’t open for another 6 weeks while they tried to settle their differences. And suddenly the markets care! (Recall what I told you about end of qtr. window dressing and the marking period!) This morning US futures are under pressure - Dow futures are down 250, S&P down 42, Nasdaq down 180 and the Russell is off by 16.

On this first day of the new qtr. (we discussed this), the gov’t is in disarray (on so many levels), eco data points will be delayed (think Friday’s NFP report) causing more potential frustration for the FED, thousands of Americans are about to be furloughed, others will have to report to work but forgo a paycheck (which is BS) all while elected officials (collect their paychecks) and air their dirty laundry for the world to see.

The government funding standoff in Congress hinges on Medicaid provisions from the “One Big Beautiful Bill Act” (OBBB).. The Dems are demanding that we add $1 trillion in spending before they sign off on this. Republicans pushed back defending their changes as necessary for fiscal discipline.

You can find all of the details online, no need to rehash it here……. But with no bipartisan deal in sight, the gridlock underscores the challenge that lawmakers face — leaving Americans and the markets bracing for potential disruptions.

Now here’s how you fix that: Americans don’t get penalized, members of Congress get penalized – they don’t get paid, and they don’t qualify for any back pay or kickbacks (did I just say that?). Watch how fast they come back to the table.

In the end, this is pure B.S. — but the delay of key macro data and the vacuum of information it would create could be just the excuse the market needs to correct (think sell-off). And that is what we are seeing this morning.

In the end, the market just wrapped up its best September in 15 years, driven by the frenzy around anything AI, another strong earnings season and the expectation of more rate cuts ahead. But here’s the rub — what investors are now pricing in for cuts may not end up being what they get.

Recent eco data has revealed a softening — not a collapse — in the labor market, while at the same time showing a slight uptick in inflation.

On the consumer side, Personal Consumption, Personal Spending and Retail Sales came in strong, New Home Sales exploded higher, and that in turn helped Durable Goods Orders surge. Even Existing and Pending Home Sales beat expectations.

Mortgage rates are down about 21% from last year’s highs, oil prices are falling – down 13% off the January high, and that’s helping to pull gasoline prices lower.

Meanwhile, both Manufacturing and Services PMIs remain in the ‘expansion’ zone, latest GDP was revised UP to +3.8%, Capital Goods Orders rose by 0.6% beating the expectation — and here’s the kicker: the Fed is cutting interest rates even as inflationary pressures are starting to pick up again – the latest PCE core price index holding steady at +2.9%. A far cry from the FED’s stated target of 2%, but well within the ‘whisper’ number of 3%. (Many analysts are now convinced that the FED has (unofficially) moved the target from 2% to 3% allowing them to cut rates since we are below the target). Capisce?

And that’s stirring up all kinds of chatter among the market paparazzi.

The big question: should the Fed stay on course and cut rates another 50 bps before year-end, or should they hold off? The answer isn’t so clear. There’s a definite crack in the school of thought at the Fed, and members have become more vocal about their views. We’re now hearing almost daily what different members see, how they feel, and when — or even if — there should be another move.

We should get (but now there is a question) a lot more eco data between now and the next FOMC meeting on October 28–29, and that will (or should) help shape both the conversation and the decision.

Layered on top of that will be the start of earnings season. Expectations are high, but it’s still anyone’s guess whether the numbers — and maybe more importantly, the guidance — will live up to the hype.

And that, my friends, could be the next curveball that sends the market tumbling. Which by the way – may not be such a bad thing! I mean who doesn’t love to go shopping when there is a sale going on?

Bonds took a break – the TLT lost 0.3% and the TLH lost 0.15%.....10 yr yields are now 4.15% and the 30 yr is yields are 4.73% - still well below levels that might signal panic. But that might change today…. This morning bonds are down again on the back of the shutdown and that will send yields up, putting additional pressure on stocks (again we discussed this on Monday).

Oil continued to churn below the trendlines – teasing the lows seen over the summer at $61.50. This morning it is down 55 cts trading at $61.80….. the news this morning is all about ‘punishing oversupply’ as OPEC+ output expands. Refer to yesterday’s commentary. Analysts are now calling for $55 oil by late winter.

Gold as you might imagine is surging higher yet again…. This morning it is up $30 at $3889 after teasing another new century ($3900 overnight). If we pierce it- that means we moved from $3800 to $3900 in 3 days…unprecedented for GOLD – that now feels more like Bitcoin or NVDA in the way it moves.

Eco data today includes ADP employment (this is not a gov’t statistic – it is a private payroll company) and the expectation is for 51k new jobs to be created, about the same as what we expected from the NFP report on Friday.

The same is true for the ISM Manufacturing PMI report, which is expected to be 49.

The ISM Prices Paid report is expected to be 62.7 – down from 63.7. Here again the dividing line is 50 – in this case anything above 50 is negative (suggests prices are rising), so while it is cooler than last month – inflationary pressures are still an issue. A report below 50 would suggest prices are actually falling…and that is not happening at the moment.

We were also expecting to get construction spending, but with the shutdown – this report will be delayed.

Historically, the threat of a shutdown is usually not a long-term event for markets (short term it usually creates an opportunity) ……and I still think it is a non-event for the markets – the weakness today is just about the excuse for a pullback as the new qtr. begins. And like I said – who doesn’t like to go shopping when a sale takes place.

European markets are all a bit higher… Prices in the Eurozone rose by 2.2% in September, following the 2% increase in August. Services rose at a 3.2% rate while food and alcohol rose by 3%.

The S&P closed at 6,688 up 27 points after re-testing 6691. This morning prices are lower, but down 0.5% or even 2% is no reason to panic…I’d love to see a 5 – 8% decline….The last time this happened – in 2018 – the gov’t was shutdown for 35 days…which was long and something I don’t think happens this time – the market dropped by about 15%, but snapped back the moment the gov’t reopened.

Here’s your new countdown:

13 days until earnings season kicks off.

28 days until the next Fed decision.

54 days until Black Friday — though you can expect “pre-Black Friday” sales to start popping up any day now.

And only 85 days until Christmas — so let the countdown begin.