US government shutdowns happen when the US Congress fail to pass a spending bill or where the US Congress refuses to raise the US debt limit. This creates a funding gap because the Congressional spending authorization is not in place.
On this occasion the fight has been over two issues:-
Surveys show 80% of Americans support the principle of allowing the 700k children of undocumented migrants, “Dreamers” the right to remain in the USA. The Trump Administration announced the end to the DACA program on the 5th September 2017 saying that a “wind down would occur for current applicants”. There is a March 5th 2018 deadline to resolve the DACA issue.
What are the statistics? There have been 18 “shutdowns” of the US federal government in the last 40 years. They have lasted on average 7 days, with a range of 1 day to 21 days.
The practical impact of a shutdown is US government staff are told to stay at home. There is a shutdown in a literal sense in that the office does not open. Only essential services like law enforcement function during a shutdown.
A shutdown damages confidence and hurts lower income more than median and higher income families. In a country where so many people increasingly live “paycheck to paycheck” it is negative for the personal consumption/ consumer side of the US economy which is 68% GDP of US GDP.
An informative report by Standard & Poor last December identified a shutdown as costing the US economy about US$6.5bn per week or c. 0.2% of US GDP.
During a period of healthy GDP growth, (Q3 2017 3.2% up 0.1% the US economy should keep its speed assuming the shutdown does not last too long. A shutdown would have a quarterly not annual impact.
Political events / shock events have a poor track record of achieving a lasting impact on US financial markets. This experience goes back a long way. The assassination of JFK bought a 2.8% drop, which was recouped over the next 2 days. Richard Nixon’s resignation, the S&P fell 1.3%, collapse of Long Term Capital Management, the S&P fell 2.2%. The worst shock, September 11th 2001 the S&P fell 11.6% in the week following the re-opening of the US capital markets. Some distinguish the Sept 11th response on the grounds that it happened whilst the US economy was slowing and was more vulnerable.
When we look at “bad events” from a US perspective, it is worth noting the US economy achieved substantial GDP growth during World War II and emerged financially in a league of its own. The US was for years, the world’s largest creditor helping to fund the rebuilding of other countries’ infrastructure. Longer term, WW2 conveniently for America, relocated the world’s financial capital to New York and ensured the US dollar became the global reserve currency.
US indices had a strong run in 2017, up c. 25%. The mood so far in 2018 remains positive as profit growth is forecast from lower US corporate taxes and accelerating GDP growth in the US, EU, China and most of SE Asia. S&P 500 earnings are forecast to grow 20.19% in 2018 to $107 – hence the index is on a forward multiple of 26.2x P/E. This is certainly an expensive rating.
My main concern for 2018 is the impact of higher US interest rates on a tired US bull market now in its ninth year.
Common sense suggests a US shutdown is a low magnitude political “Washington” event. It is not on the scale of assassinations / resignations/ major bankruptcies/ major global events. An adverse movement of 1% could be an excessive response to the shutdown.
In our view the US economic impact from the shutdown will be negligible hence the same holds for its financial market impact.
Buy: A “buy” rating is applied to companies with established businesses that are profitable and where there is further profit growth expected. A “buy” recommendation means the analyst expects the share to reach the share price target on the note.
Hold: The company’s valuation appears to reflect investor expectations in the short-term. Alternatively the company is awaiting key developments that will impact on the share price. Investors are advised to await the resolution of these key developments.
Sell: The company’s valuation appears too high having regard to material uncertainties, declining profit prospects or has sizeable funding requirements. A sell recommendation may also be applied where the board have failed in key objectives or appear to be frequently changing strategy. A sell recommendation means the analyst expects the share to fall to the price target on the note.
Neutral (Not Rated): The analyst does not maintain a view in either direction.
Please be aware that the following disclosures of Material Interests are relevant to this technical note:
Company Name – Relevant disclosures: (2)
The report’s author certifies that this research report accurately states his personal views about the subject security, which is reflected in the ratings as well as the substance of the report.
Collins Sarri Statham Investments Ltd (CSS) does not in any of its publications take into account any particular recipient's investment objectives, financial situation, and specific needs and demands. Therefore, all CSS publications are, unless otherwise specifically stated, intended for informational and/or marketing purposes only. CSS shall not be responsible for any loss arising from any investment based on a perceived recommendation.
No publication (including recommendations) shall be construed as a representation or warranty that the recipient will profit, nor avoid sustaining losses, from trading in accordance with a trading strategy set forth in a publication.
This research is non-independent and is classified as a Marketing Communication under FCA rules detailed in their Conduct of Business Rulebook (COBS). As such it has not been prepared in accordance with legal requirements designed to promote independence of investment research and it is not subject to the prohibition of dealing ahead of the dissemination of investment research outlined in COBS 12.2.5.
Trading in the products and services offered by Collins Sarri Statham Investments Ltd (CSS) may, result in losses as well as profits as the value of investments may go down as well as up. You may not get back the full amount you have invested. Any reference to past performance should not be viewed as an indication of any future performance. Investments held in overseas markets are subject to the effects of changes in exchange rates which will impact on the value of the underlying investment. Investments made in AIM and penny shares carry an increased risk due to the difficulty in creating a market in these shares. There may be a substantial difference in the buy and sell price. Leveraged products such as Contracts for Difference (CFDs), derivatives, commodities & Foreign Exchange (FX), carry a higher risk to your capital. They can lose their value rapidly and you may lose substantially more than your initial investment. A higher risk to your capital. They can lose their value rapidly and you may lose substantially more than your initial investment.
The information contained herein is based on materials and sources that we believe to be reliable however we make no representation or warranty, either express or implied, in relation to the accuracy, completeness or reliability of the information contained herein. Please note that the figures shown may, in some instances, be rounded to the nearest penny. Prices can move sharply from those quoted in this document. Current prices can be verified by calling one of our brokers. CSS is under no obligation to update the information contained herein. Neither CSS, nor its affiliates, nor its employees shall have any liability whatsoever for any indirect or consequential loss or damage arising from the use of this document.