Insights 
VT 
The Dow Jones Industrial Average increased by 482 points, or 1.04%, reaching a peak before closing up 250 points, or 0.55%. Gains were reduced by declines in tech stocks like Palantir, Tesla, and Nvidia. This marks the fourth week of positive or stable performance for the Dow. Despite the US government’s continued shutdown, markets remain positive, with expectations of a brief closure.
Labor Market Impact
A lack of key labour data limits the Federal Reserve’s resources for interest rate decisions, reinforcing predictions of a forthcoming rate cut on 29 October. The Trump administration’s aim to cut federal jobs during the shutdown could impact the labour market. Overspending at the federal level has been recorded every month since Trump took office, following an unsuccessful cost-saving initiative.
ADP Employment Change figures showed the largest drop in over two years, and the Nonfarm Payrolls report is on hold until the shutdown ends. The Institute for Supply Management (ISM) Services PMI reading was 50, against a consensus of 51.7. A reading above 50 signals expansion in the service sector, affecting the US Dollar’s strength, while Employment Index and Prices Paid Index are essential for understanding labour and inflation trends.
With the market hitting new highs but facing clear economic headwinds, we see a divergence between sentiment and data. The CBOE Volatility Index (VIX) is currently trading near a complacent level of 15, which seems too low given the government shutdown and weakening labor signals. This suggests that buying VIX call options or options on volatility-tracking ETFs could be a cheap way to hedge against a potential market pullback in the coming weeks.
We should pay close attention to the split between the Dow’s strength and the recent weakness in tech stocks. The Dow has outperformed the Nasdaq 100 by nearly 4% over the past month, a trend that could continue if economic uncertainty persists. Traders might consider strategies that play this divergence, such as buying call spreads on the SPDR Dow Jones Industrial Average ETF (DIA) while simultaneously buying put spreads on the Invesco QQQ Trust (QQQ).
Federal Reserve Rate Cut
The market is banking heavily on a Federal Reserve rate cut on October 29, with fed fund futures pricing in over an 85% probability of a quarter-point reduction. This expectation is propping up equities, but it also creates a risk if the Fed fails to deliver or signals a more hawkish stance. A contrarian trade would be to use options on Fed Funds futures to bet against a cut, which would pay off handsomely if the market’s certainty proves wrong.
The new ISM Services PMI reading of 50.0 is a significant warning sign, marking the weakest level of services activity since the brief contraction during the 2023 regional banking scare. This slowdown, combined with the terrible ADP jobs report, points to a weakening underlying economy that the stock market is currently ignoring. This makes holding some longer-dated protective puts on broad indexes like the S&P 500 a sensible strategy beyond the immediate noise.
Looking at historical precedent, prolonged government shutdowns like the one we experienced back in late 2018 often lead to short-term market dips before a resolution is found. We could use this to our advantage by purchasing weekly put options on the SPY to capitalize on any spike in anxiety as the shutdown drags on. However, these should be treated as short-term trades, as the market is likely to rally sharply once a deal to reopen the government is announced.
