October Newsletter: Compound Interest, Federal Shutdown, AI & GDP, and More!

Shutdowns are always framed as temporary. But even a “short” one can bruise confidence, jam cash-flows that businesses count on, and raise risk premiums across markets. 21 days in, this one already looks consequential—and unusual—without being unprecedented.

Economist Adam Smith advocated for a clear, rules-based playing field. For him, shutdowns muddy rules and delay contracts—hardly pro-competitive.

John Maynard Keynes argued that withdrawing government spending at inopportune moments can magnify slowdowns. A prolonged stoppage plus talk of permanent headcount cuts pushes in that direction.

Milton Friedman (Ronald Reagan’s inspiration) wasn’t so wary of shutdowns. He espoused that government can be a hindrance when it crowds out private activity, piles on red tape, or keeps failing programs alive.

Overall, most market-oriented thinkers, however, assume baseline institutional continuity. They hate uncertainty. Flip the “on/off” switch too often, and you don’t really get smaller-smarter government; you get costlier uncertainty that drags on private decision-making.

How this one compares:

• Duration: Today (as of original delivery) is Day 21. That’s shorter than 2018 (35 days, the longest on record).
• Issues at stake: The current standoff centers on ACA (Obamacare) subsidies—Democrats are holding out to preserve/extend them; Republicans want the government reopened without those conditions. ACA was also the focal point in 2013, though then it was Republicans leveraging a shutdown to block implementation. So, ACA is not a new shutdown battleground—what’s different is who is using it as leverage.
• Economic cost: Treasury and independent estimates point to meaningful weekly hits to growth when shutdowns stretch. Even if figures vary, the direction is clear: each additional week adds measurable drag.

What elevates the risk profile this time is the talk of permanent workforce reductions during the shutdown. Market-wise, that’s not a routine furlough—it’s a structural employment shock that could lift unemployment and ripple through consumption, state/local revenues, and vendor financing.

A federal court has already paused parts of the layoff plan, but the intent itself raises tail risks the longer the stalemate lasts. Using a shutdown as a negotiating ploy —by either party—historically backfires as the economic and political costs rise.

Most of the time, markets and the macroeconomy do not move in lockstep. Indices can rise on momentum and valuation expansion even as growth cools. With multiples already elevated, any stumble in growth makes prices more fragile. Yet paradoxically, bad news can be “good” news for stocks if it convinces investors that more rate cuts are coming. Easier financial conditions can extend rallies despite a slowing economy.

For investors, remember that averages can mislead: while index average P/E ratios are rich, dispersion is wide. There are still businesses priced at reasonable multiples relative to normalized profitability, capable of delivering healthy long-run returns. A prudent stance now demands quality, balance-sheet strength, and reasonalbe entry price —and treats extended shutdowns as a risk factor, but not the defining motive for action.