U.S. Stocks Rise Despite Shutdown…Retail Investors on Alert Ahead of Holiday [Analysis+]

Retail investors net sold 1.25 trillion won on the KOSPI the previous day

Past shutdowns had limited impact on the stock market

"Expect gains on rate cut hopes…upside limited by caution ahead of the holiday"

Despite a U.S. federal government shutdown (temporary work stoppage), major indices on the New York stock market set record highs, drawing attention to how domestic investors will respond.

In particular, domestic stock trading will be closed for three trading days starting on the 3rd, making short-term portfolio adjustments impossible and potentially prompting selling pressure, analysts say.

According to the Korea Exchange, individual investors net sold 1,259.9 billion won in the KOSPI the previous day. By contrast, foreign and institutional investors net bought 925 billion won and 289.5 billion won, respectively.

Individuals showed signs of anxiety, posting a net selling bias of 1,490 billion won over the past week amid U.S. shutdown concerns. They took profits mainly from stocks that had seen strong gains, such as Samsung Electronics, SK Hynix, and Hanwha Aerospace.

The U.S. federal government shutdown is the first since the start of Trump's second administration and the first in seven years since December 2018. Markets expect the shutdown's impact on stocks to be limited, as most shutdowns have been short-lived.

Indeed, on that day in New York, the Dow Jones Industrial Average and the Standard & Poor's (S&P) 500 index each surpassed record highs.

Historically, across 20 shutdowns the average duration was eight days; half lasted three days or less, and seven lasted more than ten days. The longest was the 35-day shutdown during Trump's first term.

Bloomberg reported that during past shutdowns equity markets fell briefly and then rebounded quickly. In the most recent four shutdowns, New York stocks rose in the month following the start of the shutdown.

However, this time there is a risk that key economic data releases that influence the U.S. Federal Reserve's policy decisions could be delayed or incomplete.

The Department of Labor said the release of the September employment report scheduled for this week could be delayed or suffer from degraded data quality. The U.S. Commerce Department's Bureau of Economic Analysis (BEA) may also halt report releases.

The release of the consumer price index (CPI) on the 15th is also likely to be delayed. During the 2013 shutdown, employment and price data releases were delayed by about two weeks, and in 2018 GDP and retail sales data were delayed by nearly a month.

JPMorgan said, "We expect this shutdown could last 11–15 days," adding, "The shutdown may delay major economic data releases and complicate the Fed's policy outlook."

It warned, "If the shutdown lasts more than two weeks, it could act as a headwind to economic growth at a time when the market is discussing the pace of Fed rate cuts."

The extent of damage to the real economy remains to be seen. During the 35-day shutdown from late 2018 to early 2019, 340,000 workers were temporarily furloughed. The Congressional Budget Office's analysis of service reductions during the Trump administration's shutdown estimated that up to 750,000 federal employees could be furloughed without pay.

The CBO estimated that the shutdown seven years ago reduced U.S. economic output by $11 billion, of which $3 billion (about 4.2 trillion won) was never recovered. The CBO said, "The effect of a shutdown on business activity is uncertain and will depend on the length of the closure and decisions by the administration."

Han Ji-young, a researcher at Kiwoom Securities, said, "Markets are more likely to rise in response to rate-cut expectations than to the shutdown," adding, "However, with five consecutive trading days of market closure ahead, moves to sell stocks and increase cash holdings in response to the holiday could cap the upside."

No Jeong-dong, Hankyung.com reporter dong2@hankyung.com