New Year, Same Drama

Shutdown showdown

The government shutdown has been going on for two weeks and counting. The crux of the issue? $5B to build a border wall. The irony? The economic costs of this shutdown have probably already exceeded $5B because of

  1. Wages being paid to federal workers who aren’t working (I’ve heard this is every millennial’s dream – get paid to do nothing, is that true??)
  2. Lost revenue the government can’t collect from foregone services like permits and fees
  3. The costs to the broader economy from this disruption

The government shutdown in 2013, which lasted 16 days, lowered quarterly GDP by 0.2%-0.6% ($2B-$6B). GDP is impacted by both consumer spending and government spending, and this shutdown is negatively impacting both. 

Moral of the story: Let’s hope this gets resolved soon because nothing can put today’s market (which has the daily mood swings of a hormonal teenager) in an identity crisis like lower than already feared economic growth.  

He said, Xi said

The not-so-friendly trade talks between President Trump and Chinese President Xi Jinping have been exacerbating the stock market’s worries about slowing global growth in 2019. This week included two big warning signs – on Wednesday evening, Apple guided the market to expect lower revenues than initially anticipated because of lower consumer spending in China and on Thursday morning, manufacturing data fell seriously short of expectations to its lowest point since November 2016. This told the market that trade tensions are not only impacting the Chinese economy, but also the US economy. As a result, Apple shares fell 10% on Thursday and the stock market overall fell 2.5%. 

Moral of the story: We are heading into earnings season next week, and hopefully we hear more optimistic commentary from other companies to assuage market worries on trade war impacts. Until then, best to focus on stocks with minimal exposure to international markets. 

Fed up with Fed speak

The Federal Reserve has a dual mandate – maintain stable prices (inflation) and maximum sustainable employment. Since the financial crisis in 2008, the Fed has been stimulating the economy with low interest rates but started raising rates as the economy strengthened. The Fed raised rates 4 times in 2018, including in December, when the market wanted to see the Fed pause rate increases in response to economic and market data indicating slowing global economic growth. On Friday, however, Fed Chairman Jerome Powell spoke the magic words: the Fed is paying attention to the market and will be flexible and change policy if economic conditions change. Between this and seriously solid employment data published on Friday, stocks rallied 3.4% to end the week. 

Moral of the story: Unyielding monetary policy from the Fed should not be the catalyst for our next recession. Fingers crossed this brings some stability to companies and capital markets that have been playing a “will they, won’t they” guessing game on Fed policy for the last few months.