The Dow Jones Industrial Average jumped over 100 points at Monday’s opening bell after legislators passed a continuing resolution over the weekend, averting a looming government shutdown. The resolution, signed into law by President Biden, will fund the government for 45 more days as lawmakers finalize spending legislation for the rest of the fiscal year.
The temporary agreement brought relief to investors after a tumultuous September that saw the Dow fall 3.5%, the S&P 500 drop 4.9%, and the Nasdaq plunge 5.8% amidst fears of slowing economic growth and the highest interest rates in 15 years. While all three indexes also posted losses for the third quarter, they remain solidly up on the year thanks to substantial gains in the first half.
The Dow rallied 155 points or 0.5% at the opening bell, reversing some of the losses from worries over a potential shutdown last week. The S&P 500 also bounced back 0.6% while the tech-heavy Nasdaq jumped 0.8% as investors welcomed the extended negotiating period.
“Investors don’t like to be run to the edge of the cliff constantly,” said Jamie Cox, managing partner at Harris Financial. “With not having a shutdown, we should see a very positive reaction in markets.”
However, some analysts cautioned that markets may only get temporary relief as fights over government spending continue.
“Markets are going to start to discount this being a 2024 event, as opposed to a 2023 event,” Cox explained. “They’re just going to continue to kick the can down the road and push this into an election year.”
What the Continuing Resolution Means
The stopgap measure passed by Congress in a bipartisan vote funds government operations at current levels until December 16. This gives lawmakers nearly seven more weeks to finalize appropriations bills and avert a shutdown right before the holidays.
The continuing resolution, or CR, avoids disruption of government services and operations that would have occurred if funding had lapsed. However, it simply extends current spending levels and does not resolve debates over overall budget allocations and policy priorities.
Congress has often turned to short-term CRs in recent years when they cannot agree on full-year appropriations. While CRs avoid shutdowns, they also create uncertainty for agencies and federal contractors.
The current CR includes additional aid for Ukraine and disaster relief funding. But larger disputes over spending levels, border security, and other issues remain unresolved. Lawmakers will need to compromise to pass full appropriations or else face another cliffhanger in December.
Markets Bounce Back After September Rout
The rally on Monday comes after stocks took a beating in September as investors worried about the impact of the Fed’s interest rate hikes and signs of slowing economic growth. The Dow fell over 1,000 points in September while the S&P 500 had its worst month since the pandemic crash of March 2020.
But the indexes are still firmly positive on the year, reflecting the market’s resilience after a brutal first half. The S&P 500 remains up 8% year-to-date even after its September tumble. The Dow has gained 2.5% in 2022 and the Nasdaq is still up 6% despite its September slide.
The Fed raised rates sharply this year to combat inflation, leading to concerns about an economic slowdown. However, strong consumer spending and a robust job market have helped support growth so far.
Investors are hoping for signs of easing inflationary pressures that may allow the Fed to slow its rate hike trajectory. Butanother jumbo rate hike is still expected at the central bank’s November meeting.
September’s losses mean the indexes have given back some of their substantial gains from the summer bear market rally. But fundamentally the U.S. economy remains on steady footing for now. As long as a recession can be avoided, markets may stabilize after a volatile third quarter.
What to Watch This Week
The first trading week of October brings key economic data that will provide insights into the health of the economy. The Institute of Supply Management releases its manufacturing index on Monday, followed by JOLTS job openings data on Tuesday. ADP’s private payrolls report on Wednesday may foreshadow the big monthly jobs report at week’s end.
September’s consumer price index is also out on Thursday. The CPI will show whether inflationary pressures are starting to ease after hitting a 40-year high earlier this year.
Stocks to Watch
Some stocks that could be active this week include:
Tesla (TSLA) — Delivered a record number of vehicles last quarter despite logistics issues. Earnings are coming up.
Apple (AAPL) — Unveiled new iPhones and watches last month. Sales will be closely watched.
Advanced Micro Devices (AMD) — Warning from rival Nvidia pressured chip stocks last month. AMD reports soon.
Costco (COST) — Sales from the retail giant will provide clues on consumer spending.
The government shutdown cliffhanger is over for now, allowing markets to recoup some recent losses. But until lawmakers can agree on spending bills, another funding crisis looms in December. With plenty of debates over the budget and other issues left unfinished, investors may only see a temporary reprieve before Washington brinksmanship resumes again.
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