A Truce–Not A Peace Treaty

Senate movement sparks futures-- but sticky services inflation and softening labor keep risk on the table.

KEY TAKEAWAYS

• Shutdown hits day 41 with a Senate “truce” that moves but doesn’t resolve the fight

• ISM Services expands but pricing stays hot and employment soft–tariff mentions rise in anecdotes

• Michigan sentiment drops near record lows across parties while top stock owners feel better

• ADP +42k breaks a two-month skid even as Challenger reports 153k October cuts

• Earnings surprise to the upside but consumer fatigue is building–patience and selectivity required

NEXT UP

• Motion is not progress–treat the Senate deal as headline risk relief not a macro pivot

• The wealth effect may be masking consumer fragility–don’t extrapolate market strength to Main Street

• Sticky services inflation keeps the Fed cautious even if growth cools

• Tariff pressure is seeping into price dynamics and guidance– seek companies with pricing power

• Patience is not passivity–position around fundamental strength not political theater

• You can quote me: “Earnings are holding up–consumer mood isn’t-- that gap won’t stay open forever.”

Inch by inch. And here we are at day 41 of the longest US government shutdown in history. In my Friday’s weekly recap, I highlighted the growing stress expressed by investors in last week’s market action. There was the everpresent Fed which appeared as confused as ever as to what it should do next. Equity valuations are high–no one is arguing that–though some high valuations may be justified, depending on how one pencils the math. Not shockingly, the labor situation is unarguably on very shaky ground.

Last week we had a few key private economic numbers. Two–manufacturing and services PMIs from ISM–are what I like to refer to as corporate sentiment indicators. They are based on surveys of managers in the manufacturing and services sectors. The results there were negative to neutral. The ‘neutral’ was from the services PMI that remained in expansion territory (above 50) and came in above economists’ estimates. The ‘negative’ was from the components of the services survey which showed clear signs of sticky services inflation and employment concerns across both services and manufacturing. That’s a lot for one sentence, but it kind of covers everything that we are worried about with the economy today. The real tell, however, was in the published anecdotal day which revealed a growing number of negative comments related to tariff impacts.

Friday’s University of Michigan Sentiment Index landed a hair above the worst level in its history (since 1977). Because consumer sentiment indicators based on surveys tend to be biased on party lines, I like to look below the surface of the Michigan number, which separates results by party. Friday’s print showed a notable decline in sentiment amongst republicans, independents, and democrats. That is rare. What’s also rare is a decline in republican sentiment when a sitting president is from their party.

Friday’s report was its preliminary release with the final, tidied up version due out later this month, but there was enough “there” there, to get a clear message across. According to the report “spontaneous” mentions of the government shutdown “jumped four-fold,” which can be viewed as a clear message to lawmakers. Markets may be overlooking the shutdown, but their voting constituents are not, and, according to the report, some consumers blamed the shutdown for recent job losses.

But there was a bright spot, if you could call it that. The largest “tercile” of stock owners demonstrated an 11% increase in sentiment. In plain English, that means that the stock-owning upper tier is optimistic. This really captures the divergence between Wall Street and Main Street and should be closely noted by my colleagues on the street. My regular readers should not be surprised about this because I have been highlighting “the wealth effect” quite a bit in my notes and videos.

The takeaway? Consumers are losing confidence again, and this time the drag isn’t just prices–it’s Washington. The government shutdown has officially moved from background noise to real economic worry, showing up in personal finance stress, job anxiety, and falling optimism. Inflation fatigue hasn’t gone away either, with nearly half of households saying high prices are still crushing their budgets. The only ones feeling better are those with big stock portfolios, proving once again that markets and Main Street don’t always live in the same economy. To be clear, consumers aren’t panicking–they are grinding through economic fatigue. The tone of the report has shifted from frustration to fear of consequences. Even if the indices show just a “6% decline,” the anecdotal texture of the report suggests confidence is more fragile than the headline number implies.

I won’t spend too much time on the ADP report which showed slightly better-than-expected 42k job additions–slightly better than expectations–after 2 consecutive monthly losses. Bear in mind, please that October of 2023 showed a 233k gain. It’s all about the trend, friend, and this one remains unhealthy. If you didn’t get enough out of that, you can refer to the never-quoted-except-during-a-shutdown Challenger Gray & Christmas report that showed the largest amount of October job cuts in 20 years (153,000 cuts in October), which is 175% more than October of last year.

BUT ALAS, FINALLY SOME GOOD NEWS, while we watched our favorite home teams lose (and missed Formula 1’s Brazil Grand Prix, because of YouTube TV’s fight with Disney), the Senate finally cracked the shutdown stalemate Sunday night–barely. After more than a month of gridlock, eight Democrats crossed the aisle to join Republicans in advancing a measure that would reopen the government, restore back pay, and block further federal worker firings through January 31. The deal also includes a promise for a December vote on healthcare subsidies, a key sticking point for Democrats. In short, it’s a truce, not a peace treaty–funding the government for now, while pushing the real fight on healthcare just a few weeks down the road.

Pre-markets cheered the movement, but the ink is far from dry. The House–out of session since September–still has to approve it, and Speaker Mike Johnson will need to summon his members back to Washington to vote. The bill’s healthcare compromise, which may steer federal money into consumer accounts instead of insurers, adds a fresh wrinkle to an already messy policy battle. For now, it’s movement, not resolution–but after 41 days of shutdown, even that passes for progress in Washington.

So, with that, we step into a new week with some old unknown contingencies a hair closer to being known and many known contingencies pointing to digestive discomfort. Did I even mention that earnings last week were really pretty good? Did I mention that once again, EPS growth has exceeded (so far) mine and the Street’s expectations? A known-positive contingency in the positive column. 

The Government is still shut down, but hopefully on a path to reopening. This week’s economic calendar was supposed to feature Retail Sales and inflation reports from the Bureau of Labor Statistics. Those would likely be postponed if the shutdown continued, but now with hopes of a resolution, they may be back on the table. Not sure if the nerds at BLS can turn around that quickly, but let’s say they do. Remember, we lucked out last month when BLS released September’s data late so the COLA calculations could be made for Social Security Benefits. In that delayed report, energy and a little bit of core goods pushed annual inflation to 3%, which was probably not well-received by the Fed’s inflation hawks who are actively searching for hints of tariff-based inflation. After last week’s weak showing of all of those “soft,” sentiment indicators and the awful employment data, all eyes will be on the other side of the Fed’s mandate coin. A surprise CPI or PPI–assuming we get them–could be a market mover, as can the retail figure from the Census Bureau.

The bigger question, of course, is whether any of this recent “progress” changes the real trajectory of the economy. I would argue probably not yet. The shutdown may soon end, but the economic scarring doesn’t vanish with the stroke of a pen. Every week of missed paychecks and delayed payments filters through the system–lower consumption here, deferred projects there–and it all adds up. If sentiment tells us anything, it’s that people are getting tired of being told to “hang in there.” They’ve been hanging in for two years of sticky inflation, uneven wage growth, and endless uncertainty over what comes next. Washington dysfunction is just the latest variable in a formula already overloaded with them.

Markets, however, are famously impatient. The minute the Senate deal headlines hit, futures jumped. Traders are wired to celebrate any sign of forward movement, even when it’s held together by duct tape and optimism. But investors MUST resist that impulse. Patience matters now more than ever, because these kinds of half-resolutions often disguise deeper unresolved tensions. Health-care subsidies will come back into focus in December, the shutdown may briefly reopen just to close again, and tariff chatter will continue to leak into corporate guidance. That’s not stability. That’s volatility disguised as calm.

So where does that leave us? Somewhere between cautious hope and chronic déjà vu. 😧 The labor market is clearly softening beneath the surface, inflation remains annoyingly persistent in services, and the Fed looks stuck between a rock and a headline. Rate-cut expectations are bouncing around like a ping-pong ball, but without fresh data, the market is simply guessing. The yield curve may no longer be inverted, but the signal it once gave still hangs over us: slower growth ahead. This week’s CPI, if it arrives on time, will be the next big test. Does it confirm that inflation is re-accelerating under tariff pressure, or does it offer enough of a cooldown for the Fed to ease in December?

The truth is, we can’t know without the data. The shutdown has blinded us for weeks, leaving investors to trade on anecdotes, private surveys, and guesswork. That’s never a comfortable position for markets built on precision. When the government’s data pipeline goes dark, confidence fades fast. Policy decisions, investment models, and even small-business planning all depend on those regular releases. If the shutdown ends in time for BLS to publish CPI and PPI on schedule, it’ll be a relief, but also a reminder of how fragile transparency has become.

Meanwhile, corporate America continues to do its part in keeping the lights on, figuratively and literally. Earnings, for the most part, have come in better than expected. Margins are holding, costs are being managed, and even with headwinds from tariffs and wages, many companies are finding ways to beat lowered estimates. That’s encouraging. It shows that beneath all the noise, US enterprise is still remarkably adaptable. But it also underscores a growing disconnect: corporate resilience is masking consumer weakness. You can’t have one without the other forever. Sooner or later, those lines converge.

The investor takeaway? Focus on what you can measure. The shutdown drama will pass, the Senate will pat itself on the back, and political blame will shift to the next crisis. But earnings, margins, and cash flow don’t lie. They are the heartbeat of the economy, and right now they’re sending mixed signals. Some sectors–especially tech and discretionary–are still benefitting from post-pandemic growth and AI-driven capital spending. Others, like manufacturing, housing, small-cap industrials, continue to flash yellow. 

I’ve said it before and I’ll say it again: the goal here is not to predict every tick, it’s to stay aligned with economic health. That means tuning out the political noise and zeroing in on fundamentals–corporate earnings, employment, productivity, and the direction of inflation. Those are the real drivers of valuation, not the next procedural vote in the Senate. Will CPI arrive this week? Will it show disinflation, or will tariffs keep prices sticky? Will it give the Fed cover for rate cuts, or force them back into the holding pattern they hate?

We’ve spent the last six weeks mostly blind, waiting for Washington to turn the lights back on. Maybe we’ll finally get the data we need to see clearly again. Until then, remember that patience isn’t the same as passivity. Staying patient means staying focused. Inch by inch, the economy is still moving forward. The real test is whether policymakers, investors, and consumers can do the same… without tripping over their own shadows.

FRIDAY’S MARKETS

Stocks started the day in a slump but rallied in the close for mixed results after rumors that Senate Dems were seeking a resolution of their impasse over government spending. Yields climbed as investors sold safe-haven treasuries and headed back to stocks.

NEXT UP

• No releases today, but if the Government can find its way back to opening, there may be a few good data nuggets in the week ahead, namely inflation and retail data. Of course, there are still plenty of interesting earnings announcements to chew on. Download the attached calendars for times and details.

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