TSP Report November
Facts:
- The Federal Reserve reduced its benchmark “Federal Funds Rate” range from 4.00-4.25% by another 0.25% to 3.75%-4.00% at its October 29th
- The G Fund rate has not been updated due to the government shutdown, although it is still earning interest during this time. We estimate the current rate to be either 4.25% or 4.125%.
- The unemployment rate for September has not been released due to the shutdown as well. Data from the private sector suggests the unemployment rate has either remained flat or ticked marginally higher over the past several weeks.
- The US Purchasing Managers Index (PMI) increased to 54.8 in October, with new order inflows for services rising the most of any month this year.
- The S&P 500 (C Fund) increased by 2.3% in October and is up 15.1% year-to-date.
Assessment:
Another interest rate cut and likely more to come
The Federal Reserve cut their benchmark Federal Funds Rate by another 0.25% at their October 29th meeting in response to continued slack in the labor market and cooling inflationary pressures. This economically stimulative move lowers the cost of borrowing which helps increase corporate profitability and frequently provides a tailwind to stock (C Fund) and bond performance (F Fund).
Despite Jerome Powell (who chairs the Federal Reserve) indicating that a December interest rate cut is far from a foregone conclusion, some investors are still unconvinced. Federal Funds “futures” (what investors can use to bet on the future level of interest rates) imply a 69% chance of a rate cut in December, but odds of even lower rates into the first three months of 2026 are below that of a coin flip. These probabilities reflect overall uncertainty regarding the path of future interest rate policy as the Fed tries to balance its dual mandate of preventing unemployment from increasing while simultaneously keeping inflation in check.
Shutdown side effects – assessing economic health amidst data disruptions
The government shutdown, which started on October 1st, continues to rage on as Congress hashes out how the government should be funded through year-end and onward. Not only is the shutdown causing tumult in the day-to-day lives of many Americans, but it is also preventing the compilation and release of very important economic data. The September unemployment rate and number of monthly jobs added, for instance, was scheduled to be announced on October 3rd. These data points are still unavailable. Reports pertaining to retail sales, housing, and Q3 gross domestic product (GDP) have similarly missed their original issue dates thanks to the shutdown as well. Inflation data for September was eventually compiled and distributed on October 24th, but only after President Trump issued a special authorization to release the information.
Individuals and policy makers rely on these statistics to make decisions about investments and the economy, and its absence necessitates seeking alternative sources of quality data. On the labor front, real-time metrics from Indeed show continued shrinkage of job postings while ADP indicates jobs in the private sector decreased just slightly during September. Buoyed by falling mortgage rates, the National Association of Realtors reported improved housing demand in September and a 1.5% monthly increase in existing home sales. Finally, the US Purchasing Managers Index, which is produced monthly by Standard & Poor’s, reflected a dynamic economy in October. Not only did general business conditions improve, but the report highlighted the sharpest monthly increase in new orders for services year-to-date.
In sum, government-issued economic data is not being released due to the ongoing shutdown. Data proxies originating from private sector organizations, however, indicate the economy is still in good shape and continuing to grow.
Bottom Line – Growth Despite Gridlock
Despite gridlock in Washington, the weight of evidence continues to suggest a healthy bull market in stocks (C Fund) in which corporate profits are rising and aggregate economic growth is increasing. We expect Q3 earnings announcements and GDP (once the shutdown concludes) to confirm this outlook over the coming weeks, supporting the case for a strong quarter for stocks to close out another strong year.
If you have any questions, feel free to contact me here or email me here – stephen@stephenzelcer.com
