Bessent says US 'going to finish the year' with 3% GDP growth despite government shutdown

Treasury Secretary Scott Bessent said he expects the U.S. to finish 2025 with roughly 3% real GDP growth despite the Oct. 1–Nov. 15 federal shutdown, citing recent quarters of stronger growth and the Atlanta Fed's Dec. 5 GDPNow projection of +3.5% for Q3 that would put year-to-date GDP at about 2.2%. He highlighted 2025 volatility (Q1 -0.6%, Q2 +3.8% annualized, first-half ~1.6%), noted inflation dynamics (CPI fell to 2.3% in April then rebounded to 3% in September), flagged the Fed's anticipated third straight rate cut amid labor concerns, and politicized affordability by blaming energy scarcity and overregulation for recent price pressures.

Analysis

Market structure: If growth finishes near the Treasury claim of ~3% and CPI sits ~3%, cyclical sectors (energy XLE, industrials XLI, materials XLB) and banks (XLF, KRE) gain pricing power as real rates stay modestly positive but falling toward the Fed cuts priced this week. Import-dependent retailers and low-margin consumer discretionary names will be pressured by pass-through inflation and any tariff-driven cost increases; durable-goods supply chains stay the wild card for margin compression. Cross-asset: markets likely to bifurcate — equities rally on rate cuts while long-duration bond (TLT) buyers benefit unless inflation surprises; DXY should soften on multiple cuts, supporting commodities and EM FX.

Risk assessment: Tail risks include inflation re-acceleration (>3.5–4.0% CPI YoY) that forces the Fed to pause/cancel cuts, which could spike 2s/10s by 50–150bp in weeks and crash long-duration assets. Short-term catalysts: Fed decision (days), next 30–60-day CPI/PCE prints, Dec 23 GDP revision; long-term: election-driven fiscal/regulatory shifts and tariff escalations. Hidden dependencies: energy policy shifts and immigration/trade rules materially change labor supply and input costs — second-order effects on wages and margins may lag 2–4 quarters.

Trade implications: Near-term (0–3 months) favor 2–3% tactical longs in XLE and 1–2% long SPY via 1–3 month call spreads to capture cut-driven equity upside; hedge with 0.5–1% TLT put spreads if CPI >3.5% triggers. Rotate out of small-cap, import-reliant retail (RAX, XRT underweight) and establish 1–2% long GLD as inflation tail hedge; consider pair trade long XLE / short XLU for 3–6 months to play energy upside vs utility defensives. Use options to define risk: buy 3-month SPY 1–2% OTM call spreads and finance with short 1-month ATM puts if sentiment stabilizes.

Contrarian angles: Consensus assumes growth + cuts = broad risk-on; what’s missed is that persistent 3% CPI would remove cut path and reprice yields quickly — bond market is likely underestimating a 50–100bp shock scenario. Historical analogue: 2018 rapid repricing shows equity drawdowns of 10–15% when yields jump; position sizing should assume that shock. Unintended consequence: pro-energy/regulatory rollback boosts capex suppliers (APPLIED/AMAT-like names analog) but raises consumer energy bills, pressuring discretionary demand — favor capital goods > retail on a 6–18 month view.

Key Decisions for Investors

• Establish a 2.5% long position in XLE (energy ETF) within 1 week to capture upside from pro-energy policy and potential commodity-driven inflation; target +20% upside over 3–9 months, stop-loss -10%.
• Initiate a 2% long position in SPY via a 1–3 month 1–2% OTM call spread (sell financing leg if liquidity) to play Fed-cut dynamics; unwind if headline CPI >3.5% on next print or if 2-yr Treasury >4.25%.
• Add 1.5% allocation to IEF (7–10yr Treasury ETF) or a 1–3 month TLT position to benefit from cuts, but hedge with a TLT 3-month put spread sized 0.5% to protect against an inflation surprise; close hedge if CPI remains <3.3% for two consecutive months.
• Execute a pair trade: long XLE 2% / short XLU 1.5% for 3–6 months to exploit relative energy strength vs utilities; reduce or flip if WTI falls >15% from current levels or if utilities outperform by 10% in 4 weeks.
• Short 1–2% notional of long-duration growth (e.g., QQQ via 3–6 month put ladder or short 0.5–1% outright) as a hedge against a 50–150bp yield shock; cover if 10-yr yield stays <3.75% for 60 days or CPI prints below 2.5%.