Can Equities Stabilize after the Government Reopens?

Government Reopen Brings Some Certainty to Markets

Last night, President Trump signed a government funding bill to end the most extended government shutdown in US history (43 days). The full economic impact of the government shutdown may be unrealized for some time, and government-sourced economic numbers like CPI and jobs data are likely to be delayed or completely skipped for October.

 Nevertheless, investors must realize that markets love certainty, and the government reopening puts an end to uncertainty related to this matter for now. Though some estimates suggest that the government shutdown could adversely impact quarterly GDP by ~2%, historical data suggest that markets are forward-looking and are likely to look past the negative impact of the shutdown once the dust settles. Looking at the past 40 years of market data (via @subutrade), the major indices tend to stumble in the first few days after a shutdown ends. However, two weeks later, the Nasdaq and the S&P 500 Index are higher on average 75% of the time.

Equity Indexes Fill Gaps

In technical analysis, a “gap” refers to an opening on a chart where no trading occurred. Price gaps most often happen when indexes or stocks move overnight. Market technicians watch price gap areas because they reveal where the balance of supply and demand lies, and a vast majority of the time, they are retested during regular trading hours where higher volume exists.

Thursday, the major indices filled their daily gaps from Monday (when the initial news of a potential end to the government shutdown dropped).

Seasonality and Window Dressing Loom

Seasonality in the stock market is the study of recurring price patterns and trends at certain times of the year. From a seasonal perspective, November tends to be one of the strongest months of the year for stocks, especially small caps. Over the past 15 years, the Russell 2000 Index ETF (IWM) was higher 13 times. Meanwhile, IWM averages a 4% gain in November over that period – its best month by far. Additionally, the fact that many professional money managers are underperforming the market may lead to a classic “window dressing” performance chase into year-end.

Markets Need AI Stocks to Stabilize

A bull market without leadership is unsustainable. Recently, there has been some market rotation. Money has come out of AI leaders such as CoreWeave (CRWV), Astera Labs (ALABALAB), and Nebius (NBIS). Meanwhile, there has been some rotation into stocks in other industries. For instance, Expand Energy (EXE) is up more than 10% over the past two weeks while biotech giant Eli Lilly (LLY) works on its fourth consecutive green week.

Though some market rotation is positive, bulls will want to see the AI trade reassert itself. Nvidia (NVDA), the undisputed AI leader, is the most crucial stock to watch. Unlike the previously mentioned stocks, NVDA has held up well during the market turmoil. Currently, NVDA shares are testing a critical level – the confluence of a breakout retest and the rising 50-day moving average.

Bottom Line

As traders position for year-end, the government shutdown is over, major market indices are filling gaps, and seasonal momentum looms.

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This article originally published on Zacks Investment Research (zacks.com).

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