The Dow Jones Industrial Average dropped below 46,800 for the first time in almost three weeks. This fall came alongside a downturn in AI stocks and disappointing consumer survey results. The US government shutdown, the longest ever, has stopped the release of official economic data. As a result, many now rely on unstable private data. To resolve the shutdown, Senate Democrats proposed a minibus funding plan, but House Republicans rejected it. Democrats suggested suspending ACA healthcare provisions to reopen the government, but Republican demands could lead to millions losing access to healthcare. The SNAP program, which helps 9% of US households with food benefits, has also been affected by the shutdown.

Decline in Consumer Sentiment

Consumer sentiment is declining, as shown by the University of Michigan’s Sentiment and Expectations Indexes. The Sentiment Index fell to 50.3, while the Expectations Index reached new lows, indicating worsening economic conditions. Inflation expectations are mixed, with short-term worries increasing but long-term views dropping. There are growing concerns about a ‘K-shaped’ economy, where high-income earners continue to spend while others struggle. The New York Fed notes a generally negative labor market outlook for October. Major retailers are raising prices, suggesting that inflation impacts are uneven. The situation is complicated by various economic factors. With the historic government shutdown and no official data like the Nonfarm Payrolls, we face significant uncertainty. The shakiness in the market, with the DJIA approaching lows near 46,800, calls for a defensive approach. We should expect increased market volatility and consider buying protection through VIX futures or call options on volatility indexes.

Political Gridlock and Economic Risk

The sharp decline in consumer sentiment is alarming. The University of Michigan’s sentiment index at 50.3 is dangerously close to its all-time low of 50.0, last seen in June 2022. This suggests that a significant drop in consumer spending is likely, supporting the idea of buying put options on consumer discretionary ETFs and broad market indices to protect against a downturn. The ongoing political deadlock is unlikely to be resolved anytime soon, prolonging the period of risk. Unlike the 35-day shutdown from 2018-2019, the current halt to SNAP benefits directly affects the spending power of over 42 million Americans. This situation creates a strong case for bearish positions on major retailers that rely heavily on lower and middle-income consumers. Inflation expectations are diverging, with short-term fears rising and long-term outlooks declining. This indicates immediate economic hardships for households, reinforcing the idea of a “K-shaped” economy where overall statistics mask underlying weaknesses. This fragility means that any market rallies should be approached cautiously and used as opportunities to strengthen defensive positions. With the Federal Reserve lacking access to official employment or inflation data, its future interest rate policy is now highly unpredictable. This absence of clear guidance from the central bank increases risk and raises the value of options premiums. Therefore, we should think about strategies like selling covered calls on our core holdings to generate income as we navigate this challenging period. Create your live VT Markets account and start trading now.

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