Week in Review: September 29, 2023


Week in Review: September 29, 2023

All eyes are on a U.S. government shutdown


Market summary

U.S. equities were mixed this week, although the S&P 500 fell only modestly, and the Nasdaq staged a slight gain. Outperformers of the S&P 500 this week included semiconductors, retail and homebuilders. Underperformers included utilities, food and beverage, and grocery. Treasuries were mixed with a big curve-steepening move. The dollar index ended the week up by 0.6%. 

This week

The likelihood of a government shutdown is high, as the fiscal year for the federal government closes on September 30, 2023, and begins anew on October 1. A government shutdown occurs when the government’s funding legislation expires, often due to a failure to pass a budget or a continuing resolution to fund government operations. Government shutdowns can disrupt the economy by delaying payments to select government entities, reducing consumer confidence (see Figure 1) and hurting economic growth. The severity of these implications depends on the duration of the shutdown and the specific agencies and services affected. We expect government budget disagreements to be eventually resolved, but through a bumpy process with a lot of rhetoric that may weaken the credit outlook for U.S. debt. 

The categorization of essential and nonessential government functions is crucial to navigate the impact of a shutdown effectively. The determination of what’s essential can vary and may be subject to interpretation by government agencies and officials. During a shutdown, nonessential government agencies are effectively closed, and the employees are furloughed, but they receive retroactive compensation upon reopening. However, agencies may need to furlough or retain employees based on their roles and the impact of their absence on public safety and essential services. Programs that aren’t generally subject to shutdowns include those funded by sources not attached to appropriations and duties related to the “safety of human life or the protection of property.” However, some nonessential functions at the start of a shutdown may later be considered essential if the shutdown continues and poses greater risks. 

The duration of a government shutdown directly impacts the degree of its economic toll. Historically, most U.S. government shutdowns have only lasted a few days. A short shutdown would disrupt government operations and inconvenience citizens but would likely have relatively minor impacts on the economy and government services. However, the longer a shutdown continues, the more that government functions would be affected, with delayed services, reduced regulatory oversight and additional economic consequences. A long shutdown would likely introduce disruptions to inflation and consumer spending metrics. However, given that paychecks for most if not all government employees is highly certain, there would be a certain “catch-up” period for those metrics in the months that followed. 

Importantly, U.S. debt service isn’t discretionary, meaning that during a shutdown the government would continue to pay direct service operations and operations required to pay benefits on time. During a government shutdown, Social Security benefits would continue to be paid on time, in addition to disability payments, interest payments and other payments related to direct service operations. 

Notably, a government shutdown would delay economic releases that are important to the Federal Reserve (the Fed), including labor market data, the Consumer Price Index and retail sales data. The Fed is closely monitoring this data to assess the impact of high interest rates on inflation and economic growth. Private sector data would still be released in the event of a government shutdown, but the delay in government statistics would likely disrupt the economic calendar. Disrupted economic data would paint a less clear picture of the economy for the Fed, potentially keeping rates on hold until the data resumes. 

Equities tend not to react to government shutdowns with much aplomb given the expectation that actual economic growth won’t be materially disturbed (see Figure 2). Dating back to the first shutdown, since 1976, the average return of the S&P 500 during each episode is slightly positive, and we’d note that more recent shutdowns have corresponded with slightly better returns. This indicates that investors are generally willing to look past fiscal gridlock. However, equities do tend to weaken leading into shutdowns, and the one-month decline leading into this year’s potential shutdown is on track to represent the third or fourth worst on record. We’ll note that stocks tend to rally once the government is reopened as investors look forward to the flow of more government funding. 

In our view, the risk to equities regarding a shutdown at this point may be more acute than history would suggest given the increasing level of uncertainty surrounding a number of macroeconomic headwinds. Investors may determine that a government shutdown is one negative catalyst too many and use this as an opportunity to reduce their exposure to risk. Moreover, if fiscal concerns and their handling prompt a deterioration in credit markets, equities could be vulnerable to a sell-off. We continue to monitor these risks. On balance, we continue to promote a neutral overall equity stance favoring sources of quality, profitability and stable growth. 

From a fixed income perspective, the impact of a government shutdown on rates is uncertain but likely to be minimal unless the shutdown extends for a month or more. At the moment, U.S. interest rates don’t appear influenced by a looming shutdown — the sell-off has largely been driven by a continued realization of a higher-for-longer Fed policy rates. If anything, we’d probably anticipate that rates would increase should the shutdown extend for more than a month, given economic growth.  

Going forward

The fundamental floor for risk assets including equities has risen in recent weeks as data continues to suggest that downside prospects for economic growth aren’t as severe, but with the potential U.S. government shutdown that could hurt risk assets in the near term. We expect pockets of volatility to persist as policymakers and investors alike are increasingly data dependent. Fixed income markets will need to adjust for the reality of “higher-for-longer” rates. We’ve become more neutral in our top-line positioning but maintain a defensive growth tilt underneath. We’d advocate using periods of market weakness as opportunities to upgrade portfolios. 

Within equities, we continue to favor U.S. large-cap exposure, since China’s evolving COVID policies continue to weigh on manufacturing and international trade activity. We’ve recently become more constructive on Japanese equities, relative to Europe, as the mix of policy and growth appears more favorable. In the United States, large-cap equities provide an attractive blend of quality, yield and growth at a reasonable value, albeit at higher valuations. We advocate for more “equal weight” as opposed to “cap-weighted” exposure and believe that a “catch-up, melt-up” phase could lead underperforming segments to enjoy gains moving forward. Within fixed income, we favor duration at close to, or slightly above, neutral. We remain defensive in our credit positioning and higher in credit quality. Even as the economic backdrop appears more benign, we remain on guard for the potential that credit spreads will leak wider.



  • September’s Institute for Supply Management (ISM) Manufacturing Index is expected to increase to 48 and will be released on Monday. 
  • September’s ISM Services Index is expected to decline to 53.6 and will be released on Wednesday. 
  • September’s nonfarm payrolls are expected to add 155,000 jobs and will be released on Friday.


Figure 1: U.S. consumer sentiment vs. consumer confidence (index)

Figure 1: U.S. retail sales (MoM percentage change) 

Sources: Bloomberg, First Republic Investment Management, as of September 29, 2023.

Figure 2: Congressional Budget and Impoundment Control Act, which established the federal budget process in 1976

Figure 2: U.S. labor market and economic surprises show resilience 

Sources: Bloomberg, First Republic Investment Management, as of September 29, 2023.



Market Returns (USD) as of 9/28/2023





Global Equities

MSCI All Country World

-1.0% -3.4% 10.0% 18.2%

S&P 500

-0.7% -3.0% 13.4% 17.6%

Dow Jones Industrial Average

-1.2% -1.6% 3.2% 15.9%


-0.2% -4.1% 26.9% 20.5%

Russell 2000

0.8% -4.6% 3.1% 6.3%

Russell 1000 Equal Weighted

-0.8% -4.0% 1.0% 6.9%


-2.1% -4.4% 6.7% 26.0%

MSCI Emerging Markets

-1.2% -3.8% 0.9% 10.7%

Fixed Income

ICE BofAML Municipals 1-10 Year A-AAA 

-1.0% -2.1% -0.8% 2.3%

Bloomberg Barclays Intermediate Government/Credit

-0.1% -0.9% 0.6% 1.7%

Bloomberg Barclays High Yield Bond

-0.5% 0.3% 5.7% 9.8%

Market Levels


Week Ago

Year End

Year Ago

S&P 500

4299.7 4330 3839.5 3719.04

Dow Jones Industrial Average


33666.34 34070.42 33147.25 29683.74

10-Year U.S. Treasury Yield (Constant Maturity)

4.57% 4.49% 3.88% 3.71%

Gold ($/oz)

$1,864.81 $1,920.02 $1,824.56 $1,659.83

Crude Oil ($/barrel)

$91.71 $89.63 $80.26 $82.15

U.S. Dollar / Euro ($/)

1.06 1.07 1.07 0.96

U.S Dollar / British Pound ($/£)

1.22 1.23 1.2 1.07

Japanese Yen / U.S. Dollar (¥/$)

149.4 147.59 131.95 144.59

Bitcoin Futures ($/XBT)

$27,120.00 $26,601.66 $16,498.08 $19,565.00
Sources: Morningstar, FactSet

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