A focus on quality as volatility persists
The risks of a prolonged U.S.-China trade standoff have increased, but we believe long-term fundamentals in emerging markets will offer opportunities.
The current government shutdown is now the longest in U.S. history, as President Donald Trump and congressional democrats remain at loggerheads over the security on the U.S. southern border. President Trump continues to push for $5.7 billion for a border wall, or barrier, between the U.S. and Mexico, while Sen. Chuck Schumer and House Speaker Nancy Pelosi are holding firm with a $1.6 billion proposal for border security enhancements, but no allocation for Trump’s much desired wall. Trump has threatened to declare a national emergency as a means of circumventing congressional approval to fund the wall, but hasn’t done so yet. While both sides remain at an impasse, the shutdown is beginning to have economic implications.
The current shutdown is defined as a “partial” shutdown, meaning 75% of the government remains funded, but 800,000 government workers have been furloughed without pay. Roughly half of these workers are considered essential and must continue to work without pay. During a shutdown, government workers do not receive paychecks if their departments have not received funding. (In early January, both the House and Senate passed bills to ensure affected workers receive back pay once the government reopens.) In addition, government procurement of goods and services is delayed for certain departments. Both of these issues have caused a slight drag on U.S. gross domestic product (GDP) growth.
Every week the government is closed, GDP growth on an annual basis is reduced by roughly 0.1 percentage points (pp), for a total of -0.4 pp at this point. The risk is that a much longer shutdown could start to impact GDP growth on a larger scale. Government workers could increasingly deplete their savings. A significant number of essential workers, such as TSA staff, could stop showing up for work, causing travel delays. Business confidence could be impacted as companies cannot receive government contracts. There is no sign of a significant impact yet, but we are watching closely.
Tax refunds are an important consideration during the shutdown. The acting director of the Office of Management and Budget stated that refunds will be issued, contrary to past shutdowns. However, what is less clear is the timing of these refunds. If nothing else, there is a risk that refunds will be delayed.
In addition, very few economic statistics produced by the U.S. government are being tabulated and released due to the shutdown. This makes it difficult to gauge the progression of economic growth, making it even more likely that the Federal Reserve is on hold for the foreseeable future. Even when the government opens, data will likely be choppy due to the shutdown, timing of tax refunds, and seasonal issues, which tend to lower GDP growth in the first quarter of each year.
Past performance is no guarantee of future results. The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product.. The opinions are current through January 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.