By David Nelson, CFA CMT
With a government shutdown approaching DC politics continue to be a quagmire of pork and special interests. A dysfunctional Washington is hardly surprising but the 5,593 page $900 Billion Covid-19 Relief Bill probably hits a new low. The bi-partisan package was of course tied to a $1.4 Trillion government funding bill including an endless list of pet projects and pork barrel giveaways. Most Republicans and Democrats say they dislike the bill but believe it is the only option.
Very late in the game the President has suddenly come out against the package demanding a higher payout believing he has the political capital to change the outcome. As usual the shot clock is running out with some unemployment programs already expiring.
Just about every economist on the planet understands that despite a COVID-19 vaccine now in distribution there are millions unemployed or underemployed that need a bridge loan to the other side of the valley. Those that work in close proximity businesses are most at risk. We can argue about how much and who should receive but what isn’t up for debate is that the funding is needed. The government faces a shutdown midnight December 28th.
Are government shutdowns really that bad for markets?
There have been 21 government shutdowns since 1976 lasting from a few hours to 34 days. The jury is out but it has hardly been an albatross for market performance. The worst return took place during the Carter administration in 1979. The shutdown lasting 11 days slapped the market down just (-3.9%). In fact, the 34-day shutdown that started on December 22nd, 2018 gave witness to an over 10% jump in stock prices launching the next leg of the bull market. Of course, Jay Powell had a little something to do with it hinting that the Fed was done hiking rates.
Investors have been here before and are veterans to this type of sabre rattling. Despite any near-term price reaction most investors will continue to focus on the coming recovery and look through the near-term political noise.
With that in mind some of what we’ve discussed in the last few weeks bears repeating. In the long run stocks follow the earnings stream and as long as the vaccine rollout continues toward an eventual herd immunity, I expect small and mid-cap stocks will lead the way. 22% earnings growth for the S&P 500 in 2021 is a welcome relief but it pales in comparison to the potential 60% growth for the S&P 600 and other small cap indices.
FANG stocks and other mega cap growth stories still deserve a place in your portfolio but will likely act more as a stabilizing force during times of economic and geopolitical peril.
A double dip in 2021 is not out of the question
Despite this bullish outlook for 2021 first quarter GDP continues to be at risk. Estimates for Q1 continue to head in the wrong direction and only start to stabilize in the out quarters. Of course, this speaks volumes to the need of passing sensible legislation that targets the specific needs without slowing down the eventual full re-opening of the economy.
BREXIT Deal Reached
High on the investor playbook for the last week of the year is a BREXIT deal four years in the making. Prime Minister Boris Johnson said in a Bloomberg interview that crashing out of the EU without a deal was not an idle threat and believes the resolve to do so helped bring the deal about. He goes on to say to expect big changes. The EU is set to approve the 1,250 page deal on Tuesday with the British Parliament to follow the day after.
A hard crash out was the option most feared by investors but even now with agreement in hand expect unintended consequences as both sides adjust to the exit. Divorce is never pretty but often the only option.