Closing Time

We’ve become accustomed to government funding debates and the drama as we approach each potential shutdown. Typically, they’re “solved” in the 11th hour. Not this time.

For the first time since 2018, the U.S. government shut down due to unresolved funding arguments between Democrats and Republicans.

Government Funding Lapses

However, this shutdown comes with a much different backdrop than 2018, which lasted 35 days: Markets have been strong, the Fed just cut rates, and the unemployment rate is rising. The opposite was true on all three accounts in 2018.

From an investor sentiment perspective, we’re in much better shape today than we were then. Late 2018 was marred by a confusing message from the Fed and rate hikes that fueled a swift market sell-off of nearly 20% in the fourth quarter. Much like today, the Fed was on a normalization path, but it was hiking rates from a historically low level.

Now the Fed is cutting to normalize rates as the economy cools and inflation pressures abate. This is not to say that a government shutdown is no big deal. It is a big deal and it has many consequences. But given the supportive sentiment backdrop, we may be able to manage through this in markets.

Friday Is Cancelled

One of the wrinkles investors may have to contend with is that the Bureau of Labor Statistics (BLS) won’t release economic data during the government shutdown. The next jobs report, due out this Friday, is an important piece to the Fed’s rate cut puzzle. Markets are watching this data closely, especially after large downward revisions in the prior few months and the recent firing of the head of the organization.

If the ADP employment report (a private sector survey that does get released during a shutdown) is any preview, the labor market continued to cool in September. It’s worth noting, though, that the ADP and BLS data don’t usually show a clear relationship and can often paint very different pictures.

ADP Private Employment Change

Adding to the muddiness is how the shutdown may affect the labor data for October. Even if short-lived, government shutdowns typically result in furloughs of federal employees. Though markets have historically done fine during and after a government shutdown (more on this below), this is an inconvenient time to have less visibility into labor data.

Distraction More than Detraction

Over the past 50 years, the government has shut down 20 times for an average of eight days each time. As unsettling as a shutdown may be, markets have weathered the storms quite well.

The chart below shows S&P 500 performance for the three months following the end of each shutdown, with a median return of 2.4%. In all of these cases, there were other things going on in the background that affected markets, but it’s important to note that the shutdowns didn’t seem to be the instigator of major drawdowns on balance.

S&P 500 3-Month Price Return Post-Shutdown

I’m writing this column on day one of the shutdown, so there are still many unknowns. Some believe this could last 3-4 weeks and result in permanent layoffs (rather than furloughs), but the reality is we really don’t know. What we do know is that it’s very possible, if not probable, that political polarization will continue. So markets will need to digest ongoing policy uncertainty.

Although frustrating for investors to live through, markets have looked through shutdowns in the past, regarding them more as distractions than serious volatility triggers. With this in mind, a steady hand is crucial. It’s important to resist any knee-jerk reactions during the early days. Stay prudently present in markets.

Want more insights from Liz? The Important Part: Investing With Liz Thomas, a podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.

SoFi can’t guarantee future financial performance, and past performance is no indication of future success. This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.

Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Thomas is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Form ADV 2A is available at www.sofi.com/legal/adv.

OTM2025100301

Political Pressure

It took a while, but the moment many investors were waiting for finally arrived. The Federal Reserve lowered interest rates for the first time since December, aiming to guard against the risk of further deterioration in the labor market.

The Fed cut its benchmark 25 basis points as political pressure to lower borrowing costs posed the biggest test of the Fed’s independence since the 1970s: First, President Trump attempted to remove Fed Governor Lisa Cook, triggering a legal battle that’s still going on. Then Stephen Miran, who had advised the president as chair of the Council of Economic Advisors, was confirmed to the Board of Governors and pushed for a more aggressive 50 basis point rate cut. (He also indicated he preferred to lower the rate by an additional 125 basis points through the end of the year — 50 basis points more than any other Fed official.)

While Fed Chair Jerome Powell’s focus on maximum employment and price stability has kept the central bank grounded throughout the turmoil, investors have taken note of the political clouds.

Of course, there isn’t any one definitive way to measure the impact of political risk on asset prices, but there are hints. For instance, though speculative positioning in dollar futures (DXY) has gotten more bearish throughout the year, there was a decisive increase in bearishness over the summer and in the lead up to the meeting.

Speculative US Dollar Future Positioning

A New Goldilocks?

Political concerns notwithstanding, the first rate cut in nearly a year was a powerful catalyst for financial markets, igniting a broad-based rally across multiple asset classes. Investors have embraced a “bad news is good news” dynamic, where weakening labor data was viewed as a positive for asset prices because it solidifies the case for further rate cuts. At least for now, other drivers of further rate cuts could include declining consumer demand or shrinking profit margins.

One of the most significant developments was the breakout in small-capitalization stocks. The Russell 2000 index surged to a new all-time high for the first time since November 2021 amid renewed investor confidence in the more cyclical parts of the U.S. economy. (Smaller companies tend to be seen as more sensitive to borrowing costs.)

Russell 2000

Sectors levered to the AI trade also had another strong month, and gold prices climbed to new record highs, surpassing $3,800/oz. While both are thought to benefit from lower interest rates, the month’s political turmoil also likely boosted the precious metal’s appeal as a safe-haven hedge against institutional instability and inflation.

Market Recap

Asset Returns

September 2025 Sector Total Returns

Macro

•  The Federal Reserve lowered its benchmark interest rate by 25 basis points to a target range of 4%-4.25%.

•  In their Summary of Economic Projections, Fed officials expected higher GDP growth, lower unemployment, and higher inflation.

•  Against expectations for an increase of 75k jobs in August, only 22k were added. Additionally, the prior two months were revised down by 12k.

•  After the prior month’s surge, August PPI came in below expectations at -0.1% m/m. On the other hand, CPI came in a touch above estimates at 0.4% m/m.

•  Second quarter GDP growth was revised up from 3.3% to 3.8%, driven by higher than initially reported consumer spending.

•  The University of Michigan’s consumer sentiment index fell to 55.1 in September, below consensus of 62.0, amid worsening perceptions of the job market and their personal financial situation.

•  New home sales surged to an annualized 800k, significantly above consensus for 650k and the most since January 2022.

•  Buoyed by lower interest rates, ETF flows, and ongoing central bank purchases, gold rose 11.9% to finish the month at an all-time high of $3,859. That was its best month since August 2011.

Equities

•  Emerging market stocks rose 7.2%, powered by strong tech sector gains from Taiwan, South Korea, and China.

•  The Magnificent Seven and a basket of AI-sensitive stocks also had a strong month, with gaining 9.3% and 10.2%, respectively.

•  Cyclical stocks beat defensives by 1.1 percentage points, their fifth straight month of outperformance.

Fixed Income

•  Treasurys and Investment Grade corporate bonds have had three straight quarters of positive returns, the first such streak since 2020.

•  Treasury volatility (i.e. the MOVE Index) continued its multi-month declines, now at its lowest level since early January 2022.

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Performance data quoted represents past performance. Past performance does not guarantee future results. Market returns will fluctuate, and current performance may be lower or higher than the standardized performance data quoted.

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