SHUTDOWN DISRUPTION & FADING VISIBILITY ON THE ECONOMY
Stocks opened higher this morning despite the US Trade Representative’s comment that no progress was made in US/China trade talks last week. The Dow is currently up 137 points and the SPX is up 1%. A number of sectors are up more than 1% in early trading, including utilities, communications, tech, healthcare and consumer discretionary. European markets closed higher by about .5% and Asia was up 1% or more last night. The VIX Index has fallen back to 18, which is below the long-term average of 20. The dollar is a bit stronger today and commodities are also higher. WTI crude oil is back up to $51.70/barrel after crashing to $42 last month. Bonds are mixed. Treasuries are unchanged but junk bonds are modestly higher.
With the government in partial shutdown mode since before Christmas, we can expect some negative—though temporary—impact to the economy. After all, this is now the longest shutdown in history. Economist Mark Zandi from Moody’s says his best estimate is that the shutdown will shave about .5 percentage points from first quarter gross domestic product (GDP). He divides the impact evenly between lost hours worked, and the knock-on effect to the rest of the economy. For example, with 800,000 government employees temporarily out of work, you can expect some kind of hit to retail sales. Other economists think GDP growth could actually run negative in the first quarter. But we likely won’t learn that impact right away because some key government agencies that measure and publish economic data—Commerce Department, Bureau of Economic Analysis, Census Bureau—are closed. The December retail sales report won’t come out tomorrow, and it’s highly unlikely that we’ll get the fourth quarter GDP report at the end of the month. All of which means that the shutdown is partially masking the effects of the shutdown. Of course, now that earnings season is here, we’ll get commentary from Corporate America. Today, Delta Airlines (DAL) CEO Ed Bastian said his company will lose $25mil in revenue this month due to the shutdown. Obviously, fewer government employees are traveling, and fewer FAA inspectors are on the job. The stock market has thus far ignored the shutdown because these events tend to be short-lived with minimal impact. The risk this time, of course, is a much longer shutdown that could dent consumer & business confidence levels.
Some big banks—Wells Fargo, JP Morgan—reported fourth quarter results this morning. Just as with Citigroup yesterday, the fixed income & currency trading business was terrible. But JP Morgan CEO Jamie Dimon said, “I honestly couldn’t care less” about that because it’s a temporary “speed bump.” But there was plenty of good news in the bank reports. We’re finally seeing better loan growth and consumer credit is in great shape. JP Morgan’s core loan book grew by 6.7% last year. And besides, these bank stocks corrected more than 20% in 2018 so they’re a good deal cheaper than they were a year ago. All of the major banks are trading higher today.