Banks still experiencing record withdrawals

Stocks slid yesterday as bond yields yielded pain for interest rate-sensitive stocks. Consumer confidence is fading fast which may be good news for the Fed but bad news for the rest of us.

Out to lunch. Ok, I enjoyed the 1980s! My wife and I often talk about that zany decade in which we met. It was a decade of so many “firsts,” and not all of them good. One of them was the first Federal Government shutdown. That’s right, if you don’t remember, there was a Federal Government shutdown in 1980. Jimmy Carter was the President and in spring of that year, he and lawmakers had… a disagreement on a number of issues. Carter, a Democrat, ultimately shut down the FTC in a spat with a Democrat-led Senate AND House. There were politics involved, for sure, but not the party politics that dominated most of the shutdowns that followed. WAIT, WAIT, “there were other shutdowns,” you are thinking? Come on, now you remember, there were 9 Federal Government shutdowns that followed the Carter administration’s groundbreaker. Sometimes, when things get weird, some comfort… um, understanding may be had by looking back at history.

Right now, as lawmakers struggle to see eye-to-eye on JUST ABOUT EVERYTHING, both chambers of Congress are struggling not only within their own parties, but ultimately between the two on how, and if, to pass a budget. The current one will take us through September 30^th, and if lawmakers are unable to strike a deal, anything goes… well, more accurately, something goes. We just don’t know exactly what, at the moment. First, the good news, if you could call it that, is that, now that you know that there have been shutdowns in the past, we know that the world did not come to an end. But I think, to be prudent, we should look a bit closer. So, let’s dive in.

After the 1980 shutdown, Reagan presided over 3 shutdowns in 1981, 1984, and 1986. He had to negotiate with a Democrat-led house and Republican-led Senate. George H.W. Bush clashed with Democrats leading both chambers. This was a battle over proposed tax hikes in the wake of his now infamous “no new taxes” pledge. Bill Clinton’s administration presided over 2 shutdowns in 1995 and 1996 in clashes with a Republican-led Congress. These two shutdowns were significant and involved as many as 800,000 employees being furloughed. There have been attempts to put a cost on those temporary layoffs, but none conclusive enough to quote here. My regular readers don’t need to know the exact cost to know that 800k consumers worried about their paychecks can have an adverse effect on the economy . The Obama Administration experienced a similar sized shutdown in 2013 in its disagreement with a mixed Republican-Democrat house-senate, largely centered around the Affordable Care Act. Donald Trump presided over 2 shutdowns largely centered around immigration and funding the border wall.

So, that brings us to today. First, it is important to note that this is not the same argument that threatened to cause the Treasury to default on debt payments earlier this year. That was a debt-ceiling issue. No, this one is over your average run-of-the-mill continues resolution to keep funding government activities. Now, I think that it is safe to assume that there is certainly a potential drag on economic growth when the government shuts down. I think that it is also safe to assume that the Fed’s aggressively tightening monetary policy over the past 18 months or so IS already having a negative impact on economic growth. Are you still with me? Finally, yesterday, I highlighted the importance of consumer confidence in maintaining healthy consumption, which is the biggest driver of economic growth. That economic release, to which I was referring, came in below expectations and significantly below the prior month’s print. A government shutdown and ultimately less government spending is a form of fiscal tightening. With lawmakers slamming on the fiscal brakes and the Fed slamming on the monetary brakes… well, let’s just say the brakes are on. Let’s be clear. Inflation is bad and the Fed DOES need to deal with, even though it hurts. Similarly, lawmakers need to be prudent in their spending, just as we all do. However, if we are hoping for some relief in the capital markets after last year’s painful showing along with the past few months of drag, these two events certainly won’t help. I will leave you with some hope. Here in time order are the S&P returns in the years of the 10 shutdowns that included furloughs starting in 1980: +25.77%, -9.73%, +1.4%, +14.62%, -6.56%, +34.11%, +20.26%, +29.60%, -6.24%, +28.88%. That’s right, only 3 losing years that coincided with government shutdowns since 1980. Markets have been under pressure in the past few weeks as traders are trying to make sense over economic results, the Fed, and bond yields. While the potential for a government shutdown certainly adds to the tension, traders, armed with numbers I just shared with you, are likely viewing a shutdown as background noise… for now.

EARLY BIRDS

Johnson Controls International plc (JCI) shares are higher by +1.33% after HSBC upgraded the stock to BUY from HOLD and raised its price target to $69. Johnson Controls has a forward PE multiple of 13.56x which is lower than the 17.43x mean of its peer group. Dividend yield: 2.73%. Potential average analyst target upside: +35.8%.

Zions Bancorp NA (ZION) shares are lower by -1.82% in the premarket after Morgan Stanley downgraded the stock to UNDERWEIGHT citing elevated risk. 36% of analysts that cover the stock rate it a BUY versus 48% rate ZION a HOLD, and 16% a SELL. Dividend yield: +4.82%. Potential average analyst target upside: +10.0%.

YESTERDAY’S MARKETS

NEXT UP

• Durable Goods Orders (August) are expected to have slipped by -0.5% after falling by -5.2% in July.
• Minneapolis Fed President Neel Kashkari will speak this morning.
• Earnings: Paychex before the opening bell. Micron and Jefferies after the closing bell.