To Shut Down Or Not To Shut Down; That Is The Market's Big Question

The big question today is whether the lights go off or stay on in Washington, D.C. Action on Capitol Hill could help determine how things proceed on Wall Street ahead of tonight’s deadline for a government shutdown.

A shutdown, if it happens, could mean losing some of the momentum that’s carried indices to so many record highs over the last weeks and months. Confidence is the main thing a shutdown could hit, as markets tend to dislike uncertainty. For the moment, optimism appears to prevail, as stock futures rose in pre-market trading. That could be related to the House passing a short-term spending bill late Thursday. The Senate, however, also must act. Senate leaders need to round up 60 votes from both Republicans and Democrats.

Investors should consider how the economy and Wall Street might respond to a shutdown. One question is, will people remain willing to spend or do they cut back? Coming off the great employment and housing reports we’ve recently had, a shutdown could hit consumer confidence. There’s the potential that lower confidence could cause people to start fearing to spend money. 

Various industries could be affected during a shutdown, which could then impact stock prices. A shutdown could potentially weigh on retail, which generally needs support this time of year as brick-and-mortar stores tend to struggle. Another area that could be negatively impacted is car sales. Because the government can’t spend money when it’s shut down, military and defense-related stocks could also be impacted. 

Something else to remember is that if a government shutdown lasts long enough, it could delay key economic data, which means people won’t have as much information for trading. Next week’s government data calendar includes existing and new home sales for December, leading indicators, and a first look at Q4 estimated gross domestic product (GDP).

Another consideration that might get more notice is the debt ceiling. Congress needs to eventually adjust this upward to keep paying its obligations. Even though the debt ceiling may not be raised, the government can fund itself for a limited time by borrowing from Social Security or incoming tax receipts. However, if we reach March without an agreement on the debt ceiling, the government would risk default. This would potentially be a far more serious development than a shutdown, and it’s something that hasn’t happened before. It’s probably not going to happen this time, either, and it’s a little early to start worrying about it now.

Some of the volatility this week, along with stock market losses on Thursday, could stem from fears that the government might shut down Friday, with a corresponding bearish impact on indices. Often, shutdowns cause drops in the markets, but it’s far from universal. For instance, during the last shutdown, which lasted from Sept. 30, 2013 to Oct. 17, 2013, the S&P 500 (SPX) actually rose 3.1%, according to research by MarketWatch.

Assuming a shutdown does occur, it’s still not a time to panic. While many are enjoying this rally, it’s important for investors to reassess portfolios and see if they’re over-weighted in any areas. If so, assess your risk and determine whether you might want to trim back.

Wall Street had a tentative tone on Thursday after Wednesday’s big rally to new records. Some of the pressure might have been simple profit taking as some investors opted to exit their positions, but worries about the shutdown also seemed to play a role. The Russell 2000 (RUT) index of small-caps performed worse than the S&P 500 (SPX), but all major indices fell. Almost every sector lost ground Thursday, with the exceptions of health care, info tech, and telecom. We’ll see if “defensive” sectors like telecom draw more buyers in the event of a shutdown.

Meanwhile, 10-year Treasury yields ticked up to 2.64% early Friday, the highest since 2014. The question is whether bond investors get back into a buying mode if a shutdown starts to look likely. The U.S. dollar fell against the yen and euro Thursday as shutdown worries grew and ahead of central bank meetings in Japan and Europe next week (see below). The Dollar Index tested 90 during the day Thursday but was trading around 90.50 by the early Friday.

International Business Machine Corp. IBM got a monkey off its back Thursday afternoon, reporting year-over-year revenue growth after 22 consecutive quarters of declines. The company beat Wall Street analysts’ estimates on both the top- and bottom-lines. IBM reported that revenue from strategic initiatives — analytics, cloud, mobile and security — now represents nearly 50% of its total revenue, up significantly over the last two years, with cloud growth very strong in 2017. Shares fell in pre-market futures trading, however. No major companies report earnings after today’s close, but Monday brings Halliburton Company HAL before the open and Netflix, Inc. NFLX after the close.

Crude Hits the Brakes

Oil seemed to establish a comfort zone Wednesday and Thursday, settling in right around the $64 a barrel mark both days after weeks of steady climbs. By early Friday, crude had fallen below $63.50. This could reflect some investors thinking the market might be a little over-bought, but there was also a bearish fundamental note Thursday as OPEC raised its 2018 U.S. daily production estimate by 110,000 barrels a day. U.S. production keeps rising as prices go up, but stockpiles continue falling. Last week, U.S. oil stockpiles dropped nearly seven million barrels, the U.S Energy Information Administration said. Watch for today’s weekly U.S. rig count data.

Harsh December for Housing

The icy winter weather last month could partially explain why housing starts took an 8.2% tumble in data released by the government Thursday. Starts fell in December to a seasonally adjusted annual rate of 1.192 million units from an upwardly revised 1.299 million in November. It was a bit of a head-scratcher, but keep things in perspective: There was a more than 24% decrease in single-family housing starts in the Northeast and a 16.6% decline in the South, which just happened to coincide with winter storms and record low temperatures that froze those regions during December. Housing starts had surged in October and November, while the drop in December took them back toward levels seen earlier in the year. Let’s wait for January’s reading to see if this decline reflects anything more worrisome than construction taking a break during blizzards.

Overseas Voyage

As earnings fly in fast and furious here in the U.S. next week, don’t neglect to look across both oceans for central bank news. It’s coming. The Bank of Japan (BOJ) gathers Monday and should be releasing its decision early Tuesday. Then the European Central Bank (ECB) meets Thursday and holds a press conference around the time U.S. markets open. Looking ahead to both meetings, many Wall Street analysts expect the central banks to leave their respective economic stimuli untouched for the moment. The real news is probably going to come from what central bank leaders say after the meetings, and whether they offer any hints of future policy changes or more upbeat economic views. Bank of Japan Governor Haruhiko Kuroda’s term ends in April, and it’s unclear if he’ll be reappointed. We’ll see if next week’s meeting sheds any light.