Why another government shutdown is coming and could be worse
Themes:
• U.S. equity markets post a fourth consecutive week of gains
• All three major US equity indices trade further into record territory
• S&P Capital IQ raises Q4 EPS estimates for the S&P 500
• Apple, Amazon and Facebook earnings due out
• Initial 2017 Q4 GDP, released last Friday, disappoints at 2.6%; Bloomberg consensus was calling for 2.9%
• A jump in net exports and a slowdown in net investments held back the topline number to a gain of 2.6%
• Q4 consumer spending rose 3.8%
• Q4 Durable spending rose 14.2%
• Q4 Residential investment rose 11.6%
• FOMC Meets this week – no rate hike is expected
• Chair Yellen holds her last FOMC press conference as Federal Reserve Chair
The FOMC holds its first meeting of 2018 this week and the last one chaired by Janet Yellen. The widely held consensus is that the Federal Reserve will leave rates unchanged. Themes that fuel a move on rates include current levels of inflation, anticipated inflationary pressure within the economy, economic activity and the global political-economic landscape. Given that none of these themes suggest any urgency, in regard to tightening, most on The Street are expecting a rather tame FOMC announcement on Wednesday at 2:00 p.m. EST. Investment managers are expecting three rate hikes this year, and given the economic data we have received in recent weeks I don’t see any reason for that to change. For example, last Friday’s release of initial Q4 GDP revealed that though the US economy expanded at a healthy rate of 2.6%, it was well below Bloomberg consensus of 2.9%. It has not yet achieved the escape velocity of 3% or higher. GDP expansion at that rate would likely trigger a more aggressive posture on the part of the Fed. That may change by the time the FOMC meets again on March 20.
The effects of the tax reform legislation passed in December of 2017 have not been reflected in the economic data released to date this year. As a result of the tax reform legislation, Q1 of 2018 should begin to reflect continued earnings growth, increased in consumer spending, construction spending, wage growth, continued employment gains and ultimately a higher level of GDP expansion. As it stands, the odds of a move by the Fed in March are better than 50/50.
Though the FOMC meeting and announcement will be the highlight of the week, there are several other vital data releases and earnings reports scheduled for the week. On Tuesday we receive the backward-looking S&P CoreLogic Case Shiller HPI for November. Consensus is calling for 0.6% and a yr/yr gain of 6.4%. Consumer confidence, also due out Tuesday, is expected to remain at multi-year highs. On Wednesday, the January ADP Employment Report, Q4 Employment Cost Index and December Pending Home Sales data are due out. On Friday, we receive the Employment Report for January. Bloomberg consensus is calling for the official unemployment rate to remain at 4.1% while the economy is expected to post a net gain of 176k jobs.
Shutdown 2.0
Though U.S. legislators did agree to reopen the federal government after a three-day shutdown last week, nothing of any long-term legislative consequence was accomplished. In fact, the sticking point for any agreement in Washington is DACA, and in that regard, the battle is yet to be fought. If recent negotiations are any indication, DACA will be only a part of the fight that the White House wants to have regarding immigration policy, the wall on the southern border and chain migration.
Senate Democrats and Republicans did manage to cobble together a six-year extension of the Child’s Health Insurance Program (CHIP) last week but left the main sticking point, Deferred Action for Child Immigrants (DACA), unresolved. In an effort to get the shutdown behind them Senate Majority Leader Republican Mitch McConnell agreed to hold a vote on DACA in coming weeks if negotiations don’t move forward in the meantime. From the looks of the current deadlock, and given the efforts underway by the administration to broaden its objectives for the negotiations, there is a good chance we will see another federal government shutdown in coming weeks. If one does materialize, and if it manages to last longer than the one that just occurred, markets will take a breather.
Commentary by Sam Stovall, chief investment strategist at CFRA Research
The fourth-quarter EPS reporting period is underway. S&P Capital IQ consensus estimates point to a 11.0% year-over-year increase, which is better than the 10.6% advance expected on December 29. In addition, 10 of 11 sectors are seen posting positive comparisons in Q4, led by energy (XLE), materials (XLB) and tech (XLK). EPS gains of around 3% or less are forecast to come from the consumer discretionary (XLY), health care (XLV), industrials (XLI) and telecom (IYZ) groups, while real estate should record a y/y decline. The S&P 500 (^GSPC, SPY) is projected to post a 11.0% gain for all of 2017. For 2018, EPS should climb 15.8%, which is up from the 11.4% rise expected at quarter end, with the highest upward revisions coming from energy, financials (XLF), telecom and industrials groups, while the smallest adjustments to forecasts were seen in real estate (XLRE) and technology. S&P 500 revenues are expected to rise 7.2% in Q4, as well as up 6.6% for all of 2017 and 6.4% in 2018. Finally, the S&P 500 currently trades at 18.8X next 12-month (NTM) estimates, which is a 14.4% premium to the 16.4X average since 2000.
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WTI Crude Oil (Nymex) (CL=F) $65.60/bbl
Gold (Comex) (GC=F) $1,339.80/t. oz.
10-year Treasury Note yield (CBOE) (^TNX) 2.705%
Volatility S&P 500 (^VIX) 12.65
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Economic calendar:
Tuesday
FOMC Meeting Begins
9:00 AM S&P Corelogic Case-Shiller HPI
10:00 AM Consumer Confidence
Wednesday
7:00 AM MBA Mortgage Applications
8:15 AM ADP Employment Report
8:30 AM Employment Cost Index
9:45 AM Chicago PMI
10:00 AM Pending Home Sales Index
10:30 AM EIA Petroleum Status Report
2:00 PM FOMC Meeting Announcement
Thursday
Motor Vehicle Sales
7:30 AM Challenger job-Cut Report
8:30 AM Weekly jobless Claims
8:30 AM Productivity and Costs
9:45 AM PMI Manufacturing Index
9:45 AM Bloomberg Consumer Comfort Index
10:00 AM ISM Mfg. Index
10:00 AM Construction Spending
Friday
8:30 AM Monthly Employment Report for January
10:00 AM Consumer Sentiment
10:00 AM Factory Orders
1:00 PM Baker-Hughes Rig Count
John Williams, 3:30 PM
