I’m not taking sides on the shutdown, I just want to outline the two sides.
The Dems want to link a resolution for the 800K DACA immigrants (generally referred to as “Dreamers”) to the federal budget. This is on purpose because Democrats want to highlight the divergence over immigration policy between the two parties. They feel that they hold the moral high ground on this issue. Polls agree. GOP discord on the immigration helps the Dems on this issue.
The Trump Administration wants these things to move forward with the budget:
- Full funding for a Mexico border-wall
- Implementation of an E-verify system
- End the lottery system for immigration by replacing it with a merit-based system
- An end to chain migration
As of this writing, no deal had been struck in the Senate but there are positive signs on the TV. The only thing for sure is that both sides are blaming each other. Schumer Shutdown…Trump Shutdown…the only thing I recognized was the Armstrong Shutdown where I kept the TV off yesterday except for football games on mute. I compromised. See it can be done.
What it Means for the Markets
If you are in a rush…it means nothing. Skip to the next section. Interested in why? Read on.
It’s not uncommon to experience some day-to-day volatility in stocks, as short-term traders take their cues from political headlines. Since 1976, we have stomached 18 shutdowns, some of which lasted only one day. But the Charles Sherry table below illustrates any market selloff during the closure, if it occurred, was modest.
What’s even more interesting about the above is the 1-year later data. Looks to me like investors quickly brushed aside any Congressional dysfunction.
S&P Global estimates a shutdown may shave about 0.2 percentage points from GDP each week it drags on.
And for those who depend on Social Security or Medicare…don’t worry, checks will go out as they always do.
The historical data over the last 40 years suggest that longer-term investors should not be concerned either.
As they say in Airborne School, “Hold what you got!”
Thoughts on the Current Market
I get it, I maintain an optimistic view.
I see a lot of different areas of change that will support growth for at least a year and maybe even more. I think the U.S. has entered a spending cycle that could actually last for several years…here are some reasons why:
- Tax reform – this reduces the corporate tax rate, but an underreported part of this reform is the immediate write-off of capital expenditures which will enhance profits and cash flow. It’s a big deal no matter what. Personally, I get screwed by the new tax plan, but I can argue with what it’s doing to the economy. The market has noticed…in case you haven’t.
- Reduced regulations – it helps businesses all over.
- Corporations have controlled expenses for the last 10 years – this is a “coiled profit spring” at a time that revenues are increasing.
- Repatriated foreign cash will provide the added capital to boost spending over what it would normally be. See Apple’s $250 billion coming home and the Treasury getting $38 billion of that in tax.
- Trump has scared companies away from building plants overseas – he is using the fear of trade barriers to make this happen. New building will happen here in the U.S.
- New technology – this helps significantly lower costs in both the Manufacturing sector and the Services sector. Companies will be buying new tech. They have to.
- Finally, I think we are going to see a trillion-dollar infrastructure program in 2018. This will pump up the economy into 2019, so markets should reflect that as soon as it starts getting talked about…like tax reform. This infrastructure program leads to expanding employment…which will strengthen consumer spending…which will reduce our government’s budget deficit. Oh, all that notwithstanding the tax cuts.
As U.S. capital spending accelerates, there will be a major global growth shift to follow. The U.S. will see economic growth sustained by rising investment and production rather than the consumption we have seen for the past decade.
If the elected bozos don’t do anything too silly, the U.S. can move into a period of continued growth and prosperity. Tax reform, reduced regulations, a pro-growth/business administration and a sensible Fed that will remain are all tailwinds for the market.
Finally, don’t forget about our potential for energy independence…the U.S is developing into the outsized global producer of crude and gas. This will give us an aggressive advantage over most of the world and be a catalyst for even more infrastructure/capital spending.
Keep looking forward.
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