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Market Update

Shutdown Weighs, But Markets Seem to Take D.C. Stalemate In Stride So Far

January 22, 2018

(Monday Market Open) A government shutdown enters day three today, but markets around the world and on Wall Street seem to be taking it in stride for now. U.S. stocks fell just a touch in pre-market futures trading, and European and Asian markets looked mixed.

The U.S. Senate is scheduled to vote at noon ET today on a bill that could get the government’s doors back open again, though it’s unclear for how long. One thing to keep in mind is that at least with past shutdowns, the markets didn’t see too many long-term impacts once the government re-opened. In the meantime, there’s no way to know how markets will end up reacting. Sometimes stocks have gone up during a shutdown and sometimes they’ve gone down.

On the negative side, the shutdown might cause a loss of market momentum after the big rally that started the year. Another worry is potential declines in consumer and investor confidence. In addition, long shutdowns can also affect the economy. The Bureau of Economic Analysis estimated that October 2013’s 16-day shutdown lowered real GDP by 0.3% in the fourth quarter that year. Consumer confidence also took a big hit in the month that shutdown occurred, although that didn’t seem to impact consumer spending too much as U.S. retail sales beat expectations during the same timeframe.

Looking at the broader picture, shutdowns probably cost the economy at least 0.1 percentage point of growth per week, the Congressional Research Service said in a report in 2014. This effect would presumably be on Q1 gross domestic product (GDP), which investors won’t see data for until late April.

As we noted last week, now isn’t the time to panic or make potentially emotional decisions if you’re an investor. Instead, it could be a good time to reassess your portfolio and make sure you’re comfortable with the risk you’re taking on. After last year’s rally, your portfolio might have become overweight in certain sectors and no longer in line with your risk tolerance and investment objectives. It’s important to consider fixed income as part of a portfolio, along with stocks.

Outside of Washington, D.C., life goes on and Wall Street has a lot on its plate this week. That starts with earnings, as we’re nearing the heart of the season. Netflix (NFLX) kicks things off Monday afternoon, and investor expectations appear elevated heading into the report, evidenced by shares climbing to a new all-time high this week. 

As usual, analysts have been focused on NFLX’s subscriber growth. In Q3, NFLX reported it had added 5.3 million members, with a bulk of the adds coming from international subscribers. That exceeded management’s guidance for 4.4 million net member additions. For Q4, management issued guidance that it expects to add 6.3 million subscribers — 1.25 million in the U.S. and 5.05 million internationally.

Tuesday before the open brings earnings from Johnson & Johnson (JNJ), Procter & Gamble (PG), and Verizon (VZ), with General Electric (GE) and Ford (F) on Wednesday. Some of the big companies reporting later in the week include Caterpillar (CAT), Intel (INTC), Honeywell (HON), Union Pacific (UNP), Southwest Air (LUV), FiatChrysler (FCAU), and Starbucks (SBUX).

Keep an eye on the transports, because shares of those companies have been flying high. Their earnings calls could give some feedback on whether rising energy prices might be a problem for them as the year continues, and whether consumer demand remains robust.

As always, there should be plenty of data to keep investors busy this week, though there’s none today. Existing and new home sales for December are due Wednesday and Thursday, respectively. Last week’s housing starts data for December disappointed, which could weigh on expectations for home sales as well. Remember that December was a snowy, cold month across much of the Eastern and Southern U.S., which seemed to freeze housing starts to some extent. We’ll see if bitter cold kept homes from selling, as well.

Arguably, the kingpin of data this coming week is the government’s first estimate for Q4 gross domestic product (GDP), due Friday morning. The last two quarters saw growth of 3% or better, and a third consecutive quarter of 3% growth would be the first since back in 2004-2005. This week’s number is just the first of three estimates, so it’s not the final word. The Atlanta Fed’s GDPNow site projects 3.4% GDP growth in Q4, up from its previous estimate of 3.3%. The estimate rose after last week’s strong industrial production data.

There’s news coming from overseas, too, as both the Bank of Japan (BOJ) and the European Central Bank (ECB) hold meetings this coming week. The BOJ is scheduled to discuss its meeting outcome early Tuesday, while the ECB is scheduled for early Thursday. In each case, analysts don’t expect any changes in stimulus at this juncture, according to media reports. However, if the banks sound optimistic in their economic projections for coming months, that could raise expectations for some sort of policy change perhaps by later this year. The ECB already has cut the amount it’s spending on stimulus as the economy in Europe improves. The euro has been climbing strongly against the dollar recently, and the ECB meeting could help determine if that trend continues.

Another thing to watch this week is the 10-year Treasury yield, which last week reached its highest level since 2014 at 2.66%. If yields continue moving higher, at some point it's likely to impact the stock market in a negative way. But right now, the market seems like it can probably stomach higher rates since the economy and earnings are strong. In one sign of rising borrowing costs, 30-year mortgage rates recently ticked above 4% for the first time since last summer. Also, some of the cyclical stocks, which have led the rally, eased a little last week, which could be a sign of things slowing down a little with stocks at or near all-time highs. Oil also fell last week for the first time in five weeks.

Early Monday saw little change in some key markets, with gold, oil, Treasury bonds and the dollar all making only minor moves.

Interestingly, the VIX volatility gauge fell sharply on Friday — back toward 11 — despite fears of a government shutdown. It rose slightly to 11.55 by early Monday. However, stocks spent much of the week moving up and down a bit more dramatically than they had last year, especially on Tuesday when the Dow Jones Industrial Average ($DJI) rose nearly 300 points after the open and fell about 100 points by late in the session. It remains to be seen if this is simply shutdown-related or a new pattern getting underway.



Both the VIX (candlestick chart) and gold (purple line) have moved higher over the last month, perhaps an indication that anxiety is growing a bit as stocks continue posting record highs. Some investors might be seeking a little protection even as they participate in the rally. Data source: CBOE, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Markets Did OK During Prior Shutdowns: Although the past doesn't guarantee the future, it's interesting to look back and see just how the market performed in the past when the lights went out in Washington. As we noted Friday, stocks actually rose in October 2013 when the government shut down, with the S&P 500 (SPX) climbing 3.1% in a little over two weeks until a budget deal took effect.

During the 21-day government shutdown of late 1995 and early 1996, the SPX rose a smidgen, just 0.1%. It also rose during a shorter shutdown earlier in 1995. The last time stocks really lost ground during a shutdown was way back in October 1990, when the SPX fell a little more than 2% over the five days the government was closed. There were numerous shutdowns even before that, and the market’s overall record is an average 0.6% decline on such occasions, according to MarketWatch. It stands to reason that prices might fall during a shutdown, because investors tend to fear uncertainty.

A Little Less Confident: Despite strong jobs growth and a tax bill that politicians say could put money in most peoples’ paychecks, consumer confidence dipped a little in early January, according to the preliminary University of Michigan Survey of Consumers issued Friday. The headline number dropped to 94.4, which was below Wall Street analysts’ expectations and down from 95.9 in December. That’s still a pretty good number and in the range of what we saw most of last year, but it is curious to see the slight dip when the economy seems to be rolling along. The final January survey could provide more insight.

Where’s the Powder? It’s been a “dismal” start to ski season, according to USA Today, which reported Friday that resorts from California to Colorado are plagued by low snow totals. A drought is hurting much of the Western U.S. ski region, though resorts farther north are faring better with the white stuff. Despite the lack of assistance from Mother Nature, stocks of companies that tend to benefit from ski-related business made quick turns through the slaloms lately, with shares of both Vail Resorts (MTN) and Peak Resorts (SKIS) up over the last month.

Typically, ski stocks tend to do well in a strong economy, as more people might be willing to shell out funds for expensive vacations to resorts. Airline stocks like United Continental (UAL) and Delta (DAL) — with hubs in ski areas such as Denver and Salt Lake City — are also chugging higher. While DAL wasn’t speaking specifically about passengers flying to ski resorts, the company did say on its earnings call earlier this month that the demand environment is the “healthiest” its seen in years. UAL is scheduled to report Tuesday, and MTN will report later this quarter.

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