Quote of the Week
“In this life, you are only as good as what you leave behind.” – Unknown
Technical Corner – Larry
This year I am starting a new monthly discussion of the portfolios we have managed for the prior month.
The month of January was not kind to us. The markets moved against our position of being negative on the stock markets and being positive on bonds. The stock market rose last month which hurt our 20% short position. Some of you who chose not to invest in the inverse funds (short position) weren’t affected by the rise in the stock markets.
I am still convinced that the stock markets are in a long-term downward trend. Europe has just entered a recession, and China is also in a strong downward trend. The government shutdown and the tariffs are not helping and are accelerating the downward trend in the U.S. economy. There are warning signs everywhere. The stock markets are at the top of their trading ranges, and I expect that when the reality of a slowing economy sets in, we should see the stock market start to decline and better days will be ahead for us with our short position.
Another factor that will weigh on corporate profits is rising wages. It seems counterintuitive that rising wages are bad for the stock market, but think about it this way. If the economy is slowing, business revenue will start to decline. With declining revenue and rising wage costs, profits will start to be squeezed. If profits start to shrink, stock prices will start to go down. Before every recession going back to the ’70s, wages accelerated and topped just before the recessions started.
Our bond position which is at least 70% of the portfolios didn’t do well as interest rates were steady to slightly rising during January. Remember that bond prices go up when interest rates go down, and bond prices go down when interest rates rise. The normal direction of longer-term interest rates during a slowing economy is down. Even the Fed has recognized that the U.S. economy is slowing and has put a hold on raising short term rates for intermediate future.
The downward trend in the world economies is accelerating and cannot be turned around on a dime. Even if there is a trade agreement with China, the trend is too strong to change the direction of the worlds’ economies.
I am confident that we are positioned for what is inevitably coming.
What Are the Costs of the Government Shutdown?
The longest government shutdown in U.S. history ended after 35 days on January 25, 2019. A temporary appropriations bill extended funding for shuttered federal agencies to February 15, 2019, while a bipartisan committee negotiates a new spending bill for the Department of Homeland Security.1
The full impact of the shutdown will not be known for months, but official estimates have been released, and it may be helpful to look at the estimated cost to the U.S. economy, as well as the effect on public safety and other government services.
Nine departments closed
The shutdown began on December 22, 2018, when funding lapsed for nine cabinet-level departments (agriculture, commerce, homeland security, housing and urban development, interior, justice, transportation, Treasury, and state) as well as a number of other government agencies.2
About 800,000 federal workers in these organizations missed two consecutive paychecks.3 Some 380,000 of these workers were originally placed on unpaid leave (furlough), while 420,000 were deemed “essential” and required to report to work without pay.4 As the stoppage progressed, tens of thousands of furloughed workers were ordered back to work without pay.5
All federal employees will receive full back pay as soon as possible — many by the end of January — but about 1.2 million government contractors had no guarantees and may lose income permanently. It has been estimated that contractors faced more than $200 million a day in lost or delayed revenue.6-7
Family hardship and public safety
Missing paychecks was a hardship for many families and especially difficult on lower-paid essential workers. (Furloughed workers in many states could apply for unemployment benefits or seek other employment opportunities.)
The most visible manifestation of this issue was increased absences by Transportation Security Administration (TSA) workers. On January 20, the absentee rate for TSA airport screeners was 10%, up from 3.1% on a comparable day last year. According to the TSA, many workers took time off for financial reasons, such as an inability to pay for child care or transportation. Increased absences resulted in long lines, delays, and gate closures at some airports.8
Air traffic controllers, who are better paid, remained on the job without pay and normal support staff. However, on January 25, an increase in absences by controllers temporarily shut down New York’s LaGuardia Airport and led to substantial delays at airports in Newark, Philadelphia, and Atlanta. This may have been an impetus to reopen the government later that day.9
Other public safety employees who worked without pay include the U.S. Coast Guard, customs and border protection agents, and law-enforcement officers at the Federal Bureau of Investigation, U.S. Marshals Service, Drug Enforcement Administration, and Bureau of Prisons.10
While essential workers maintained some federal services, furloughed workers left significant gaps. National parks were closed or understaffed, resulting in lost revenue, vandalism, and mounting trash.11 Many federal services were delayed or suspended, ranging from food inspections and civil court cases to consumer protection services, rural home loans, and federal reports used for everything from projecting the economy to deciding what crops to plant.12-16
The IRS called back 26,000 furloughed workers to process tax refunds, but almost 14,000 of them had not reported as of January 22. The IRS is understaffed under normal circumstances, and it may take time to get up to speed, adding to the challenges of processing returns that reflect changes in the new tax law.17 About $2 billion in tax revenue may be lost as a result of reduced IRS compliance efforts during the shutdown.18
Broader economic impact
According to the nonpartisan Congressional Budget Office (CBO), an estimated $18 billion in government spending was lost or delayed during the shutdown. This includes $9 billion of direct spending on goods and services and $9 billion in compensation for federal employees. Assuming the government stays open, most of this is expected to be recouped over the next eight months, but $3 billion in gross domestic product (GDP) may be permanently lost.19
Three billion dollars is a tiny fraction of total U.S. GDP — about 0.02% — but quarterly GDP growth may take a larger hit. The CBO projects an annualized loss of 0.2% growth in the fourth quarter of 2018 and 0.4% in the first quarter of 2019. So the CBO’s pre-shutdown estimate of 2.5% annualized growth in the first quarter would be reduced to 2.1%. GDP growth may be 1% higher than expected in the second quarter.20
Even if delayed spending is recovered, lost productivity by furloughed workers and government contractors will not be regained.21 Consumer confidence dropped in December and January due in part to the shutdown, but may rebound if the government remains open.22 A longer-term concern is the potential loss of federal workers, including those who leave for other opportunities and qualified candidates who may look elsewhere due to doubts about the future stability of federal jobs.23
It remains to be seen whether all government agencies continue to operate with full funding after the February 15 deadline. If so, the long-term economic costs of the shutdown may be relatively small, but the impact on individuals who fell behind financially or missed out on government services could be significant.
1, 9) The Washington Post, January 25, 2019 2, 18-20) Congressional Budget Office, January 2019 3, 23) CNBC, January 26, 2019 4) The Wall Street Journal, December 21, 2018 5, 13) CNN, January 16, 2019 6) Federal News Network, January 28, 2019 7) Bloomberg, January 17, 2019 8) Associated Press, January 21, 2019 10) ABC News, December 29, 2018 11) nationalgeographic.com, January 7, 2019 12) The Wall Street Journal, January 9, 2019 14) Federal Trade Commission, December 28, 2018 15) CNBC, January 9, 2019 16) CNN, January 8, 2019 17) The New York Times, January 25, 2019 21) S&P Global Ratings, January 11, 2019 22) The Conference Board, January 29, 2019
Copyright 2019 Broadridge Investor Communication Solutions, Inc
By the Numbers
REQUIRED MINIMUM DISTRIBUTIONS– If you turned age 70½ sometime in 2018, then you must begin taking annual withdrawals from your IRA accounts no later than 4/01/19. If you delay your 1st withdrawal until 4/01/19, you must also take a 2nd distribution by 12/31/19 (source: Internal Revenue Service). – Michael A. Higley, BTN 02-04-2019
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.
Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.