Delayed Economic Data Had An Effect on Stocks

At a Glance

  • Stocks rallied during the government shutdown, bucking the historical trend. But there was a critical difference this time around.

As we put the government shutdown further and further into the rearview mirror, it’s probably a good time to recap a few of the lessons learned.

The first is that the stock market doesn’t seem to care. Prior to this most recent shutdown the statistics on past market performance during shutdowns was mixed to slightly negative.  In the nine previous shutdowns (52 days total) the S&P 500 was unchanged for the duration. During the shutdown of 2018-19, however, the stock market rallied a whopping 10 percent in 35 days.  So, if there is a negative effect on stocks it’s clearly not very pronounced.

Better Late Than Never

There is another facet of the government shutdown that has been less covered, but in some ways is more important. That’s the delay of economic data released by government agencies. This problem was exposed on February 14 with the release of a much-delayed retail sales number. The number came in far worse than expected causing several economists to question whether the shutdown had somehow corrupted the governments normal data collection process.

The second delay of significance was the Feb 28 look at GDP. That number came in better than expected.  There is a key takeaway to these events. There has been a long-held belief that the stock market treats any unknown as a net negative. This axiom has held true for economic data, earnings and important election and referendum results.  Markets tend to trade soft ahead of binary events because of heightened risk awareness. This time it was clearly different as the stock market has been ebullient throughout the shutdown and earnings season.

Fed Goes Neutral

What changed?  The answer to that question is simple. The Fed changed. When November began, the Fed was on a path of tightening that was described as “auto pilot.”  Within a couple of weeks, however, the weight of the trade war, the government shutdown, Brexit and the prospect of an earnings recession caused the Fed to pivot from hawkish to neutral.

The most prominent takeaway of this period is that the stock market still has a partial addiction to easy money.  The message is clear: as long as the Fed greets negative news with increased accommodation the market seems satisfied.  I don’t love this takeaway anymore than you do, but my job is to observe and act not judge.  Of course, I do judge but it’s more of a hobby.

Clash of Wills

As we look to the near future, there appears to be a titanic clash of wills fast approaching. Most would agree that there is going to be some kind of trade resolution reached with China. The details of the deal will probably be murky, but the market will most likely believe that tariffs will be dropped and the new trade world will be better than the previous.

The big question is how will the Fed react?  Historically, the Fed has been reluctant to flip flop so soon after a, well, flip flop.  This characteristic bodes well for the stock market.  If two of the main reasons the Fed hit the breaks have disappeared and the Fed doesn’t react, that seems bullish to me.

One More Thing

At this point it may have become conspicuous that I haven’t mentioned the Brexit negotiations. Brexit is a tough read as it continues to linger on far longer than anyone anticipated.  My honest belief is that I’ll be five years into my relaxed retirement home living when I hear that the next big “final” Brexit vote is coming up.  In other words, we have to focus on the information that’s available. That includes new, up-to-date data releases.

Jim Iuorio is managing director of TJM Institutional Services and a veteran futures and options trader. Jim has spent his career brokering futures and options trades for large institutional clients in equity indexes, interest rate products, commodities and foreign exchange. His recommendations to clients blend macro-economic themes with technical analysis.

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