The downward movement that U.S. stocks experienced on October 2 indicated the concern that many global market participants have about the impact of the federal government shutdown that began on the first day of the month.
The depreciation in U.S. equities and its link to the shuttering of non-essential government offices could be helpful to anyone who wants to make money by investing in the stock market.
Investors push U.S. stocks lower
The Dow Jones Industrial Average dropped 0.4 percent to close at 15,133.14 at 4 p.m. in New York, according to Bloomberg. The S&P 500 Index plunged by as much as 0.9 percent during the trading session, but managed to close only 0.1 percent lower.
This happened after the S&P enjoyed a 0.8 percent surge on October 1, as global market experts believed that the impact of the shutdown would not be significant, the media outlet reported.
“The market is trying to figure out how serious the situation in Washington is,” Paul Zemsky, ING Investment Management’s chief investment officer of multi-asset strategies, told the news source. “Today’s worry is that it is more serious than we originally thought, which is putting pressure on the market.”
Myriad economic concerns
The potential headwinds that this event could provide combines with concerns about other matters such as the tapering of quantitative easing and the lukewarm nature of the labor market.
Additionally, it’s important to note that these different factors could potentially work together and serve to drive the markets lower. Global asset markets received a boost last month when the U.S. Federal Reserve indicated that it did not yet plan to reduce the pace of quantitative easing, but lowering the volume of these monthly debt purchases is considered inevitable by many.
Impact of government shutdown
Economists have already started to calculate how much they think the growth rate of gross domestic product will be reduced by the government shutdown, and these market experts recently provided a median forecast that if the event lasts for a week, GDP will be reduced by 0.1 percent, according to Bloomberg. The loss in output would become more severe if the government remained insolvent for a longer period of time.
“The impact on the broader economy does start to kick in as the shutdown extends beyond a week, two weeks,” Stephen Stanley, chief economist at Stamford, Connecticut-based Pierpont Securities LLC, told the news source. The estimates provided by his firm were in-line with the median forecast provided by the poll. “If it’s a couple of days or even a week it’s something that we’ll have forgotten about a month or two from now.”
There are concerns that the longer the government is shut down, the greater the fluctuations in global asset values will become, according to Reuters. Susanna Gibbons, a portfolio manager at Minneapolis-based RBC Global Asset Management, noted that many are becoming more pessimistic about how long the closure of certain government offices could last.
“Before the consensus was that any shutdown would be short-lived,” she told the news source. “But the positions have hardened over the last few days. Some increased volatility for the next couple of weeks would not be surprising.”
Delays in release of government data
There are also concerns that some key economic reports could be delayed as a result of the federal government being shut down, according to Investing.com. For example, the U.S. Department of Labor is scheduled to release a report later this week that contains the jobs figures for September.
The labor market – and its gradual improvement over the last several years – has been scrutinized by a wide range of global market participants, including those who want to make money by investing in the stock market.
The sentiment of investors has been further undermined by a recent report released by the private sector, which indicated that in September, U.S. payrolls only grew 166,000, which is lower than the figure of 180,000 that was predicted previously, Reuters reported.
Upcoming debt dilemma
Another concern that could also serve to provide headwinds to the economy and global asset markets is the showdown that is coming up related to the national debt ceiling.
This matter is more crucial than the current government shutdown, and there is significant anticipation surrounding how the discussions between lawmakers will unfold as they determine if – and by how much – the limit on the nation’s debt should be increased, according to the media outlet.
Failure to raise the ceiling could result in the nation defaulting on its existing debt obligations. Such an event could cause substantial depreciation in the value of stocks by bolstering risk aversion significantly.
Since an event of this nature could have such a significant effect, it would be wise for any individuals who want to make money trading stocks to stay abreast of these events.
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