Shutdown Jitters!

After ignoring the risks from the government shutdown for a long period, the North American capital markets finally appeared on a shaky ground after the United States’ government shutdown entered its longest run. Historically, the markets have largely ignored the government shutdowns as they typically get resolved before they begin to cause lasting damage to the economy. However, the current shutdown carrying on beyond the 35 days (previous record) put together with air travel disruptions reaching a critical stage and on top of disruption of several key economic data releases which investors and Fed officials rely on to take decisions added to investors angst during the past few weeks.

While the extended government shutdown finally tested the investors patience, a few other concerns too have been building for a while. The chatter on whether Artificial Intelligence related stocks are in a bubble territory has been building for some time after their continued advance over the past few months. This was compounded by statements from leadership of a few banks, who during their third-quarter earnings releases said that they think a few areas of Artificial Intelligence related stocks have frothy valuations. We think high valuation alone can bring about some volatility; however, is not the reason enough to derail the bullish momentum in equities. As per Bloomberg data, the earnings-per-share for S&P 500 Index is expected to increase by ~+12.9% for the year 2026; while the earnings-per-share for the Bloomberg Artificial Intelligence Total Return Index is expected to increase by ~+23.9% for the year 2026. In other words, the relatively higher valuation of Artificial Intelligence companies has justification in their earnings story, in our opinion.

We think the policy rates trajectory from the Central Banks remains a tailwind for capital markets and should continue to be constructive for the markets. The bond yields had been declining in anticipation of a policy rate cut for the most part during the month of October up until the announcement of a rate cut decisions on 29^th October by the United States Federal Reserve and Bank of Canada. On the decision date both the Central Banks cut policy rates by 25 basis points. The Bank of Canada reduced the policy rate to +2.25% from +2.50% and the Federal Reserve reduced the policy rate to +4.00% from +4.25%. Despite getting the cuts as expected, the bond yields advanced after the announcement of rate cut decisions as both banks downplayed on the expectations of further rate cuts. Tiff Macklem, the governor of Bank of Canada, said that policy rates are low enough to stimulate the economy; while Jerome Powell, the chair of United States’ Federal Reserve, said that ‘further reduction in the policy rate at the December meeting is not a foregone conclusion’. (See Figure 1)

Figure 1: Bond yields advanced after rate decisions

Source: Bloomberg

Notwithstanding the hawkish tone, we note that the United States Federal Reserve will end the process of shrinking its Balance Sheet as on 1^st December; and while the data remains scant; the evidence continues to point towards still weak labour market. Inflation has been creeping up for past few months; however, it is likely that Federal Reserve stays more tolerant of higher inflation to support the economic growth. Further, any resolution to reopen the government will alleviate any immediate concerns from investors. As of this writing, the US Senate had made progress towards ending the shutdown. We think the current balance of risks continues to point towards a constructive environment for the risk assets.

Source: Bloomberg

Vipul Arora is a Portfolio Manager with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact him at 613-258-1997 or visit ofarrellwealth.com to discuss your particular circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. Insurance products and services are provided through Assante Estate and Insurance Services Inc