Kristina Hooper, chief market strategist at Man Group explains what Wall Street history tells us about shutdowns and the stock market reaction.
Transcript:
CAROLINE WOODS: Joining me now, Kristina Hooper, chief market strategist at Man Group. Kristina, great to have you at the desk.
KRISTINA HOOPER: Great to be on.
CAROLINE WOODS: Kristina, let’s start by talking about the looming government shutdown. We’ll know at midnight if that’s going to happen. What impact would it have on the markets if we do see the government shutdown?
KRISTINA HOOPER: I don’t think it’s going to have much impact at all. You know, if we look at recent history, government shutdowns have led to stocks being relatively flat to providing positive, modest gains. In fact, the longest shutdown we’ve seen, 2018 to 2019, we saw the stock market do quite well. Why? I think because investors have blinders on and the government shutdown is just noise that really doesn’t have any impact on fundamentals. So it’s easy to ignore, especially since the assumption is that it’s going to be over pretty quickly and there isn’t going to be any kind of material impact.
CAROLINE WOODS: If investors have blinders on, what is the biggest risk right now to the market that they might be missing?
KRISTINA HOOPER: So I certainly think that markets haven’t necessarily accurately priced in recession risks. What we saw was high-yield spreads spike in April as Liberation Day tariffs were announced and markets really digested the size of those tariffs. But then yields came down, the spreads came down quite dramatically. And nothing, though, changed with regard to the tariffs. We still have very significant tariffs. So I think there’s been a mispricing — almost an artificial calming of markets that doesn’t reflect recession risks because nothing’s really changed since April to now. And yet spreads have come down a lot.
CAROLINE WOODS: What is the likelihood of a recession in your mind right now?
KRISTINA HOOPER: I think the likelihood is definitely higher than markets anticipate. I think what we’re seeing is a significant slowdown. We’re seeing what I call sick canaries in the coal mine. They’re not dead yet, but they’re sick. We’re seeing defaults increasing on a variety of different kinds of loans, especially student loans, but also credit cards. We’re seeing auto loans as a problem. The seventh largest used car retailer went belly up a couple of weeks ago. So there’s definitely pressure on consumers. And I think that continues as more of the tariffs are passed on to consumers by companies. So it’s just something of a perfect storm that I think could create something of a recession.
CAROLINE WOODS: So what does that mean for stocks then? Because we aren’t seeing that play out in the stock market right now. We’re on pace for a very strong September — fifth month winning streak — and we’re poised to enter Q4 tomorrow, which is historically the best quarter of the year.
KRISTINA HOOPER: That is a great question. Right now, this could go one of two ways. We could actually have seen the stock market decouple somewhat from the economy because it’s being so driven by excitement around AI spend. And so this can be its own juggernaut and continue to propel the S&P 500 forward. Or we could see stocks start to anticipate some kind of significant economic downturn. And we could see a drawdown in the fourth quarter. I think there is so much uncertainty about where we go from here. It’s a time to be very well diversified.
CAROLINE WOODS: How do you position, given all of that uncertainty, especially given the fact that a recession is in your forecast? You said there’s a greater chance than the market’s expecting, but do you think there’s a greater than, say, 50% chance that we’re in a recession next year?
KRISTINA HOOPER: I do think so. That’s my base case from where I sit today. I see a jobs picture that’s going to deteriorate rather quickly. I think there’s more pressure on consumers. I think prices are going to continue to go up, and that’s just not a good environment for an economy that is so reliant on consumer spending. So in that kind of scenario, again, I think we need to be very well diversified across and within the three major asset classes because we just don’t know. And in fact, that’s the way investors have been positioned. If you think about it, they’ve been long stocks — we’ve seen this really strong rally. At the same time they’ve also had exposure to gold. And we’ve seen a really strong gold rally. So I think we could have that same environment going forward where there are different asset classes that perform well because there are concerns about a variety of different scenarios, or there’s an anticipation that a variety of different scenarios are likely to come to fruition.
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