Government Shutdown: Rush into Hard Assets

Dear Investors,

September was a positive month for equities but mixed for crypto, despite the Fed’s decision to cut interest rates. In crypto markets, this was a classic example of “buy the rumor & sell the news” event. However, at the turn of the month, in reaction to the US government shutdown, Bitcoin strongly outperformed and in early October reached new all-time highs. As usual, we uncover market drivers and highlight what may lie ahead.

Executive Summary:

Government Shutdown: Why this time may be different

• Historically, US government shutdowns had limited market impact. Typically, they get resolved quickly and the impact on economy and financial markets is muted.

• However, the current shutdown comes amid a Fed rate cut cycle, paired with cracks in the labor market, sticky inflation and historically low sentiment, causing Gold and Bitcoin to outperform significantly

• Trump warned that “there could be firings” if the shutdown continues, implying that furloughed workers might lose their jobs permanently, which would be different than in previous episodes

Calm before the storm? Volatility markets seem relatively muted despite all-time highs in various risk assets

• Vol markets are surprisingly calm. From bonds to equities to crypto, implied vol levels are historically low

• This could be an opportune time to tactically hedge positions

The trend is your friend: trend-following indicators signal further upside potential for risk assets

• Trend signals support current market performance, flipping from short into longs right around the US government shutdown

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Government Shutdown: Why this time may be different

The United States has entered another federal government shutdown. That alone is not usually a market-mover: past shutdowns (1995–96, 2013, 2018–19) tended to deliver only short-lived economic hits and mixed, often muted, equity responses once investors “looked through” the political drama. Academic analyses and past empirical work show consumption and paychecks were temporarily affected in earlier episodes, but index-level equity returns mostly recovered quickly. However, there are a few reasons why this time it could be different:

1. It sits squarely inside a Fed cutting cycle despite “sticky” underlying inflation & all-time high equity markets despite a softening labor market

2. Safe-haven flows (e.g. into Gold) are already sharper than usual, paired with historically low levels of consumer sentiment

3. Investors have already fled the US Dollar year-to-date, signaling weakening trust in the greenback

4. Lastly, the current US administration has already reduced headcount and spending through DOGE, and in early October, Trump alluded to making some of the furloughed job losses from the shutdown permanent

Volatility markets seem relatively muted despite all-time highs in various risk assets

Despite the various macro and geopolitical challenges on the horizon, markets remain optimistic and vol markets across the board are not yet pricing in panic. In fact, relative to historical levels, current forward risk premiums are muted. For risk averse investors, who want to protect gains, hedging could be an alternative to divesting.

Trend-following indicators signal further upside potential for risk assets

Our proprietary trend indicators flipped from short into long one day ahead of the official US government shutdown. The short-term signal can be volatile but provides beneficial additional input into our multi-factor model suite.

In this state of the market, we remain optimistic about directional crypto exposure but see opportunities for tactical trades on top of existing exposures. As always, we are happy to provide clients with insights and ways to implement these ideas into their individual portfolios.

If you would like to discuss any of our current market observations, please reach out to us via email.

info@matrixportam.com