Longest Government Shutdown Ever To Hurt Q1 GDP Growth

Longest Government Shutdown - Winning Streak Ends, But Stocks Had A Good Week

The S&P 500 was down 1 basis point on Friday, so it ended its 5 day winning streak. That's a great performance because the market rebounded from where it was earlier in the day and is overbought. Nasdaq fell 0.21% and the Russell 2000 was up 0.14%. VIX was down 6.72%. The S&P 500 increased 2.54% this week. Amazon and Facebook were up over 4%.

As you can see from the chart below, the percentage of oversold stocks in the S&P 500 has fallen dramatically. But the percentage of overbought stocks hasn’t increased much.

The market isn’t at the level seen in January 2018. To be clear, I don’t think stocks are as overbought as they were in January 2018. I’m modestly bearish and think stocks can correct about 3% because they have run too far too quickly.

Longest Government Shutdown - Netflix & Yeti Rally

Netflix was one of the biggest winners in the S&P 500 as it increased 4% on Friday. It was up 13.45% on the week. It is entering the week it reports earnings on a huge rampage. I don’t think it will sell off after it reports because of the huge momentum created by “Bird Box.”

It’s amazing to see such hype considering the mediocre 62% audience score on Rotten Tomatoes. If Netflix can parlay an unspectacular movie into a boost in subscribers, the business model is stronger than I thought.

Yeti stock rallied 10.83% after hours because the firm raised its Q1 guidance. I’m used to negative data dumps on Friday afternoon. That’s when investors aren’t paying attention.

Instead we got very positive news as Yeti stated it expects $241.2 million in sales which beat estimates for $227.3 million. It raised its EPS guidance from 79-82 cents to 88-90 cents.

This beat estimates for 81 cents. I have been bearish on Yeti since its IPO. This doesn’t prove my thesis wrong because I believe the business model is weak which makes it a long term sell. It’s not shocking that the company had a good quarter as its products have a cult-like following. I would increase my short in the next few weeks as the stock rallies.

Best 2 sectors on Friday were healthcare and consumer staples which were up 0.33% and 0.3%. Worst sectors were utilities and materials which fell 0.44% and 0.4%. There’s not much to read into sector performance as it was a mostly flat day.

Longest Government Shutdown A Disaster For Q1 GDP Growth

CNBC rapid update finally updated to show the median of 10 estimates for Q4 GDP growth is still 2.9%. The NY Fed’s Nowcast for Q4 GDP growth fell one basis point to 2.48%.

It should be a decent quarter. Q1 GDP growth is quickly shaping up to be a disaster even though we have almost no economic data from January yet.

Based on the international economic weakness and the weakness in manufacturing, many analysts expect a modest decline in growth as compared to Q4. The NY Fed’s Nowcast expects 2.11% growth.

The problem is being caused by the government shutdown as it is now the longest one ever. In the government shutdown of 2013 which lasted 16 days, GDP growth was hurt by 0.4%. This government shutdown has been 22 days. The impact to Q1 is about to be 2 weeks at a minimum.

The big issue here is that President Trump and the Democrats are showing no interest in compromising in the near term. It seems likely that this will last at least a week more. The impact to Q1 GDP growth will likely be over 0.4%. If you take 0.4% off 2.11% growth, you are left with just 1.71% growth.

Longest Government Shutdown - According to S&P Global Ratings, the shutdown has cost the U.S. economy $3.6 billion by Friday. 

There are 800,000 federal workers not being paid. On Friday they missed their first paycheck. If the shutdown lasts a couple more months, it will cause a delay in tax refunds.

The only good news is the impact on Q4 GDP growth will be very small as Bank of America Merrill Lynch lowered its Q4 growth estimate by 0.1% to 2.8% because of the shutdown.

I don’t see the stock market selling off on the government shutdown next week because it is a short term issue. Earnings season will be much more important. I wouldn’t be surprised to see the media blame any volatility on the shutdown.

Bulls should hope that occurs because it will pressure leaders to compromise quicker.

Longest Government Shutdown - Treasuries Rally

It’s interesting how stocks had such a good week while the treasury market was flat.

Treasuries rallied on Friday as the 10 year yield fell 4 basis points to 2.7% and the 2 year yield fell 3 basis points to 2.54%. The difference between the two yields is now 16 basis points. One more hike this year could cause the Fed funds rate to be above the 10 year yield as the range would be 2.5% to 2.75%.

There’s surprisingly a 15.3% chance of a hike this year. This is because of Fed guidance because it doesn’t make sense to raise rates with a slowing economy and weakening inflation.

There is a 12.9% chance of a cut and a 71.8% chance of no action. I don’t see any chance of a cut in the first half of the year because the economy isn’t weak enough. The government shutdown’s effect on the economy won’t change Fed policy because it is transitory.

Longest Government Shutdown - Conclusion

If I had to guess, I don’t think the government will re-open next week.

That means the impact to GDP growth will be at least 0.5%. If the government is re-opened, stocks won’t react because they haven’t sold off on the news. I’m very interested to see the next jobless claims report because it should spike because of the shutdown.

Other news I’m following is the start of earnings season. Major banks and Netflix will be the earnings reports I am watching the closest.

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1 Comment

  • Ernest BROWN

    January 15, 2019

    I'm a green horn I don't know what Im doing, I'm trying to learn FROM you.