'We've Seen This Movie Before' | US Shutdown Impact

Government Shutdown Impact - The fiscal impact of the government shutdown is expected to be minimal initially, but the focus is on the potential impact on the labor market [1] - Approximately 40% of federal workers, around 900,000, may face furlough, and all federal workers could experience pay delays [2] - Delayed employment information, initially expected on October 3rd, adds to the uncertainty [3] - Historically, shutdowns have had a limited effect on bonds and stocks, but stretched equity valuations could make this time different [3][4] Equity Market Concerns - The stock market's high price-to-earnings (P/E) ratio, around 22 times during the year, raises concerns about future returns [5][6] - Historically, buying into the S&P 500 with a forward P/E multiple of around 22 has resulted in muted returns of plus 2% to minus 2% over the next ten years [6] - Investors' patience may wane as the shutdown continues, potentially leading to a shift from stocks to credit [5][6] Private Credit Market Dynamics - Strong demand exists for alternatives in credit, particularly private credit, due to its contractual nature in a volatile market [7] - Rapid growth in private credit has raised concerns about the market overheating and attracted regulatory scrutiny in some European countries [8] - Increased demand from asset managers with private credit funds and private equity sponsors requires careful deal selection [9] - There has been a degradation in underwriting quality and covenant terms, along with compressing spreads, indicating a need for caution [10] - High yield bonds have seen significant issuance, reaching $60 billion this month, twice the normal monthly amount and levels not seen since 2021, indicating demand in both public and private markets [10] Economic Indicators - Soft data has recovered from April lows, but hard data, such as monthly spending, shows a bifurcation, with higher-income consumers still spending while lower-income consumers may be in a recession [13] - Relatively weak data for travel in August and hotel occupancy could signal that higher-end consumers are becoming more cautious [14]