The markets drifted lower this week, after hitting new highs repeatedly in September. The reason can be chalked up to heightened uncertainty due to both the ongoing government shutdown and further threats of increased tariffs on China. Coupled with a murkier data picture due to economic reports not being released (including jobless claims) during the shutdown, we have quite a bit of uncertainty. Expect headline news to drive the markets while the shutdown continues.
The question on everyone’s minds is what impact the government shutdown may have on the economy. Fortunately, we’ve had 20 prior shutdowns since 1976 to give us an idea. While each shutdown is different, if history is an indication, the economic impact to Gross Domestic Product (GDP) will be between -0.10% and -0.20% per week. While this may sound alarming, it should be noted that once the government reopens most of the declines quickly reverse as government and consumer spending recover. But I hear you asking, “What effect will this have on the stock market?” Again, we cannot make predictions, but looking at past shutdowns the data suggests markets mostly ignore them. The reason is that most shutdowns last on average only eight days. While we’re currently past this average, it seems likely that there will be capitulation from one side or the other in the next few weeks.
Regarding long-term impacts, again we have data that shows returns ranging from -4.4% to +10.3% during a government shutdown. More importantly, in 18 out of the last 20 shutdowns, the markets were higher in the following 12 months. This is all to say, the headline news will most likely make this current situation into the next “crisis” while the reality is that these things don’t drag on forever. In fact, it is typically air traffic controllers that bring these shutdowns to an end. Deemed essential to public safety, air traffic controllers are required to work without pay during the shutdown. As has happened in the past, while they cannot go on strike, they can call in sick, which has the consequence of flights being delayed or cancelled around the country. We are already seeing signs of this in California (the Burbank Airport to be specific) but expect this could expand to other airports as the shutdown continues.
In company news, we learned that The Olive Garden is shaking up its menu. While I don’t frequent this restaurant, I mention it because it could be the next big trend. As it turns out, they are shrinking portion sizes alongside lower prices. This is clearly an indication that consumers have had it with inflation and may be financially stressed. We’re seeing the same thing from McDonalds, which is testing a new value menu and bringing back lower-priced combo meals. PepsiCo is also making changes. To my surprise, 60% of the company’s revenue comes from Lays, the potato chip division. No, they are not reducing the amount of air in their chip bags. But they are changing the logo and branding. The redesign will incorporate a new logo that looks like the sun and have potatoes on the bag, including the phrase “Made with real potatoes.” As it turns out, a 2021 survey discovered that 42% of consumers didn’t know Lay’s were made from potatoes.
And in closing, I turn to the 2025 Nobel Prize in Literature. For those of you who adhere to strict grammar and punctuation, you may want to skip this one. This year’s winner is Hungarian author Laszlo Krasznahorkai who is famous (or perhaps infamous) for his lack of proper grammar. In his debut novel, Satantango, each chapter is a single paragraph with no line breaks. His most recent novel, Herscht 07769, is a single sentence that unfolds over 400 pages. While modern fiction has its merits, I’m not sure I’m ready to throw out grammar and punctuation just yet. Now you know.