Insights 
VT 
The Dow Jones Industrial Average (DJIA) fell sharply on Thursday, dropping around 250 points to the 46,300 region. This decline followed a period of little movement and occurred as the US dealt with the ninth day of a government shutdown.
The shutdown, which affects federal services, is causing concern due to lack of progress in the US Senate. Republicans and Democrats remain at an impasse, primarily over national healthcare provisions that are due to expire. While Democrats seek a temporary extension, Republicans refuse to address healthcare until the budget is settled, advocating for a replacement of the Affordable Care Act.
Consumer Sentiment and Market Impact
With official data releases halted due to the shutdown, attention shifts to private datasets. This includes the upcoming University of Michigan Consumer Sentiment Index, which reflects consumer attitudes in the US. The Index assesses aspects such as personal finances and business conditions, influencing the perception of consumer spending, which is vital to the US economy.
High sentiment readings are generally positive for the US Dollar, indicating increased consumer spending, economic growth, and potential inflation. Analysts value this survey as it incorporates recent consumer interviews, providing timely insights into consumer confidence, thus affecting market insights and economic forecasts.
The recent drop in the Dow Jones shows that market anxiety over the nine-day government shutdown is finally taking hold. We are seeing implied volatility rise, with the CBOE Volatility Index (VIX) climbing above 26 this week, which is a significant jump from the relative calm of September. For derivative traders, this higher volatility means option premiums are increasing, creating opportunities to position for larger price swings.
Market Strategy Amid Uncertainty
With the political stalemate in Washington showing no signs of ending, the path of least resistance for equities is likely lower in the immediate future. We believe purchasing put options on broad market ETFs like the SPY is a reasonable strategy to capitalize on further downside. Looking back, we saw a similar pattern during the lengthy 35-day shutdown in late 2018 and early 2019, where markets remained under pressure until a resolution was found.
The lack of official government data has placed enormous weight on tomorrow’s University of Michigan Consumer Sentiment Index. Recent private surveys have suggested that persistent inflation, which we saw tick up to a 3.9% annual rate last month, is starting to weigh on household budgets. A sentiment reading below the consensus forecast would confirm this weakness and could trigger another leg down in the market.
However, we must remember that government shutdowns are temporary, and they historically conclude with a relief rally in the market. Traders with a longer view could consider buying call options with expiries in late November or December to position for this eventual rebound. This strategy allows one to potentially profit from the recovery once a budget deal is inevitably struck.
