Insights 
VT 
Government Shutdown Delay
US senators have been unsuccessful in passing spending proposals for the fourth time, extending the federal government shutdown. The shutdown has delayed key economic data, including September’s Nonfarm Payrolls report, with ADP Employment Change and Job Openings signalling a softening labour market.
Fed Governor Stephen Miran stated the Fed has room to cut rates, hoping for data by the October FOMC meeting. Last week, the major indices reached record highs due to technology and semiconductor stock gains, following OpenAI’s $6.6 billion share sale.
The Dow Jones Industrial Average comprises 30 highly traded US stocks and is price-weighted. The index’s movement depends significantly on company earnings reports, macroeconomic data, and interest rates set by the Federal Reserve.
With the market pricing in a 95% chance of a Federal Reserve rate cut in October, we believe conditions are favorable for bullish positions. Lower interest rates typically reduce borrowing costs for companies and make stocks more attractive relative to bonds. Derivative traders should consider strategies that benefit from a continued rise in major indices like the Dow Jones and S&P 500.
This expectation for rate cuts is supported by a clear trend of cooling inflation and a softening labor market. We have seen Core PCE, the Fed’s preferred inflation gauge, trend down from the persistent levels of 2024, now sitting closer to the 2% target. Recent ADP jobs data, showing additions of only around 150,000, confirms the slowdown that began to take hold late last year.
Market Strategies and Considerations
For traders looking to capitalize on upward momentum, buying call options on broad market ETFs like the SPDR Dow Jones Industrial Average ETF (DIA) is a direct approach. This strategy provides leveraged exposure to the upside while limiting the maximum potential loss to the premium paid for the option. Expirations in November or December would capture the period where rate cuts are widely expected.
The technology sector continues to show exceptional strength, building on the powerful AI-driven rally we witnessed throughout 2024. Given the recent news about OpenAI, traders might find opportunities in call options on the tech-heavy Nasdaq 100 ETF (QQQ). This allows for targeted exposure to the market’s leading growth drivers.
The ongoing government shutdown introduces a layer of uncertainty and could cause short-term volatility spikes. While the market is currently viewing the shutdown as a reason for the Fed to cut rates, a prolonged event could spook investors, as we saw briefly during the 35-day shutdown back in 2018-2019. This environment makes selling out-of-the-money put spreads an interesting strategy, as it allows traders to collect premium while betting that the market will not experience a sharp decline.
Even with a bullish outlook, it is wise to manage risk against any unexpected negative news from the shutdown or the Fed. We see value in purchasing VIX call options or a small number of out-of-the-money put options on the S&P 500. This acts as a relatively cheap form of portfolio insurance against a sudden market reversal.
