U.S. Stocks Extending Upward Trend As Traders Shrug Off Shutdown

U.S. equities extended their rally for a sixth consecutive session, reaching new record intraday highs, with the Dow up 0.8% and the S&P 500 up 0.4%. This upward momentum persists despite an ongoing U.S. government shutdown, as investors largely disregard warnings of potential GDP impact. The market's strength is primarily driven by increasing confidence in Federal Reserve rate cuts, fueled by weaker-than-expected non-government economic data, including a decline in the ISM services PMI to 50.0, which has elevated probabilities for rate reductions in October and December; computer hardware and healthcare sectors are leading the gains.

Analysis

U.S. equity markets are demonstrating significant upward momentum, with major averages reaching new intraday highs for the sixth consecutive session despite the ongoing U.S. government shutdown. The Dow advanced 0.8% and the S&P 500 gained 0.4%, indicating that investors are currently discounting warnings from Treasury Secretary Scott Bessent regarding the shutdown's potential negative impact on GDP. The market's bullishness is primarily fueled by weakening non-government economic data, which reinforces expectations for imminent Federal Reserve rate cuts. Specifically, the ISM services PMI fell to the breakeven level of 50.0, well below the 51.7 consensus, following an earlier report from ADP showing an unexpected decline in private sector employment. These data points have solidified market conviction in monetary easing, with CME's FedWatch Tool indicating a 97.8% probability of a quarter-point rate cut in October. Sector leadership is concentrated in computer hardware, where the NYSE Arca Computer Hardware Index surged 2.4% to a record high, and in healthcare, which saw its corresponding index gain 1.6% to a seven-month high. Meanwhile, the ten-year Treasury yield rose 2.3 basis points to 4.113%, suggesting a nuanced reaction in the bond market.

Key Decisions for Investors

• Given the market's focus on forthcoming Federal Reserve easing, investors may consider maintaining or increasing exposure to U.S. equities, as weak economic data is currently being interpreted as a bullish catalyst.
• Focus on sectors demonstrating strong relative strength, such as computer hardware and healthcare, which are leading the market's advance and hitting multi-month or all-time highs.
• Monitor developments related to the U.S. government shutdown; while currently being ignored, a prolonged or more impactful shutdown could eventually shift market sentiment and poses a key downside risk to the current rally.
• Pay heightened attention to private economic indicators like the ISM survey and ADP employment figures, as they have become the primary inputs for Fed policy expectations in the absence of official government data.