The Government Shutdown Might Be Over But the 60/40 Portfolio Isn't Coming Back
The long-standing government shutdown is coming to an end, but U.S. debt is growing and investors must turn to hard assets.
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On Monday morning, as headlines emerged that the U.S. government is about to end a prolonged shutdown, the S&P 500 rallied 1% as it moved back above 6,800.
The government has been shut down for more than 40 days before Republicans and Democrats reached a deal to end the nonsense, with flights and air traffic controllers at risk of not showing up to work and Americans unable to travel especially, as the holidays were coming near. But a headline that was even more relevant was when President Trump announced a dividend of at least $2,000 per person will be paid, excluding high-income people.
This was rather unexpected from a government that is running about $2 trillion in deficits, with no end to its spending and more tax cuts being made. The U.S. debt rose by $1 trillion in just two months and the Federal Reserve is cutting rates. What is going on?
After their parabolic runs this year into October, gold and silver pulled back about 10% and 20%, respectively, but the story is far from over. Gold is benefitting from a paradigm shift in demand from global central banks as they diversify out of U.S. treasuries. There is $4.7 trillion now held in gold compared to $3.9 trillion in U.S. treasuries. On top of that, it is the true ultimate hedge against inflation.
With CPI staying stuck around 3%, with the Fed now cutting rates and even possibly adding assets to its balance sheet and with the stock market close to all-time highs, fiat currency is getting further debased. The Fed is focused on the labor market side of the equation and, following last week's weaker-than-expected ADP and Challenger reports, it will probably cut rates by another 25 BPS in December.
U.S. interest expense is a nightmare for the Fed, so it works to lower the rates even though it is always too slow to react to inflation picking up. This is just the monetary side of things; the U.S. fiscal spend is on a whole other level.
Even though this dividend income may come from tariffs, as hinted by the president, previously it was assumed that the tariffs would be used to pay down U.S. debt. Either way, the money will have to come from somewhere to pay all of these things as tariffs revenue is only one-tenth of what is needed to pay down the debt, per the August numbers.
The equity markets have been weak into October due to repo markets and some month-end funding stress. The excess liquidity in the system was used to make way for the government shutdown putting extra stress on the system. Now that the deal is close to being done, this will take some stress out of the system.
Q3 2025 earnings have come in much better than expected as the sell-side assumed 6% year-over-year growth prior to the reporting, but the average is closer to 14% year-over-year growth in EPS. There are talks of an AI bubble given the hyper capex spend, but the cash flow and earnings are keeping up with the multiple expansion of the large-cap techs.
This is different from 2000, when multiples rose in excess of any "money" being made. As forward revenues rise, the market remains well supported but there will be winners and losers, so stock and sector selection will be key. Bonds stay range bound as the Fed cuts rates, mixed with more U.S. debt issuance to pay for the U.S. fiscal debt.
Bitcoin was meant to be the star performer for this year, but is flat for the year despite gold being up 50% and silver north of 70%, as there is genuine tightness in their physical markets. Bitcoin may be the digital version of gold, but it is also symbolic of risk in the markets. At times of stress, it is knocked down as retail gets flushed out. Given the leverage and use of zero-day to experiation (0DTE) options, the cycle is not over, the moves just get exacerbated both ways.
For now, judging by the trajectory of the U.S. debt, investors need to be invested in hard assets to compensate them for the stubborn and soon to be rising inflation. The old 60/40 portfolio model is dead.
