The specter of a government shutdown Thursday barely nudged investors out of their practiced disregard for Washington dysfunction.
Stocks notched a rare-for-this-year backward slip as new storm clouds gathered over the Capitol. The Dow Jones industrial average dropped 97.84 points, or 0.4 percent; the S&P 500 shed 4.53 points, or 0.2 percent; and the Nasdaq Composite dipped 2.23 points, or less than 0.1 percent. The wobble came a day after the Dow closed above 26,000 for the first time, completing the fastest 1,000-point gain in its history.
But market watchers aren’t overly concerned about the possibility of lawmakers failing to forge an agreement that averts a shutdown. The Thursday downturn was mild. Plus, history suggests investors remain hardy when such standoffs force a federal shuttering.
“Although a government shutdown sounds scary, the reality is it has been a non-event historically for equities,” LPL Financial senior market strategist Ryan Detrick noted in an analysis last month. The firm found in the 18 shutdowns over the past 40 years, the S&P 500 has shed an average of 0.6 percent during the closures — and actually gained during the last three.
See the chart here:
Indeed, during the last shutdown, a 16-day event in October 2013, the market started to rally a full week before lawmakers finally reached an agreement to break their impasse. See the Wall Street Journal's chart:
Dan Clifton, head of policy research for Strategas, chalked up that mid-shutdown pivot to investors’ recognition that a budget deal was in sight and with it, a framework for lifting the debt limit. “The closer you get to the debt ceiling deadline, the more danger it poses to financial markets,” he said. Although the Treasury has been employing extraordinary measures to service the country’s debt since last month, the federal government isn’t expected to run out of maneuvering room until mid-March.
Clifton said the weakness on display in the market Thursday probably will grow more pronounced today in the absence of a deal, but “the concerns are less about the economics than the ability of Washington to govern during a crisis.”
Provided any shutdown remains relatively brief, the economic pain should be contained. S&P Global projects the closure would cost the economy about $6.5 billion per week. That’s precisely how long the average modern shutdown lasts, per this chart from Strategas:
And as we’ve seen over the last year, investors have demonstrated a willingness to look past all manner of otherwise disruptive or worrying signals out of Washington as they push share prices ever higher.
Programming Note: I will be in Davos next week covering the World Economic Forum, at which President Trump will speak a week from today. I'll be attending panels, interviewing attendees, and trying to get a bead on how the president's "America First" agenda is being received among global leaders. We'll be hitting your inboxes at 6a.m. Swiss time (1a.m. EST) Monday through Thursday, and Friday morning after Trump's speech. And don't worry -- we'll also be covering the ins and outs of a shutdown if indeed it does happen. If you're not signed up for my newsletter, please do so here.
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— Shutdown showdown. The Post's Mike DeBonis, Ed O'Keefe and Elise Viebeck: "The House passed a short-term extension of government funding late Thursday after Republican leaders, with help from President Trump, cobbled together enough GOP votes to overcome an internal revolt. Still, the possibility of a federal shutdown moved closer to a certainty after Senate Democrats rallied against the GOP proposal, announcing they would not lend their votes to a bill that did not reflect their priorities on immigration, government spending and other issues.
By Thursday evening, nine Senate Democrats who had voted for a prior spending measure in December said they would not support the latest proposed four-week extension, joining 30 other Democrats and at least two Senate Republicans — and leaving the bill short of the 60 votes needed to advance. As a result, Republican leaders — long on the defensive against claims that they were failing to govern — appeared emboldened as they sought to cast the Democrats as the obstacle to a compromise to keep critical government functions operating."
And while the potential shutdown remains in limbo, here's what Trump tweeted this morning:
Government Funding Bill past last night in the House of Representatives. Now Democrats are needed if it is to pass in the Senate - but they want illegal immigration and weak borders. Shutdown coming? We need more Republican victories in 2018!— Donald J. Trump (@realDonaldTrump) January 19, 2018
— "Has the government shut down yet?" Politico has this helpful primer. And The Post's Eric Yoder and Katie Mettler answer all your questions about what a shutdown would mean for everyone from federal workers to people just waiting for some mail to arrive.
— Speaking of which, who gets sent home if the government shuts down? The Washington Post's Lisa Rein, Darla Cameron, Reuben Fischer-Baum and Kim Soffen have a graphic reporting on the percentage of workers who would be furloughed at Cabinet-level departments. Check out the full graphic here.
— And while we're asking questions: Can the GOP govern? The Post's Damian Paletta and Erica Werner: "The immediate challenge Thursday was a refusal by Senate Democrats to join with Republicans in passing legislation that would keep the government open for 30 more days while legislators continued to negotiate a longer-term solution. But the impasse raised deeper questions about the GOP’s capacity — one year into the Trump administration — to govern. Never before has the government experienced a furlough of federal employees when a single party controls both the White House and Congress, but that’s what will happen after midnight Friday if a spending bill fails to pass Congress.
While Democrats criticized Republicans for failing to do what was necessary to win their support to keep the government open — a responsibility that has historically fallen to the party in charge — even some Republicans acknowledged there had been a profound breakdown in how Washington is run... 'We’re not getting our job done, and it’s about time we admit it and we change the system so it works for both the majority and the minority parties,' Sen. Mike Rounds (R-S.D.) said Thursday. A visibly frustrated Marc Short, the White House’s legislative affairs director who is working to try to avoid a shutdown, placed all of the blame of the current predicament on Congress."
— Jury's out on winners and losers. The Post's Paul Kane: "Public and private polling is giving each side something to hang their hat on if the federal government partially shuts down this weekend — an increasingly likely scenario. For Democrats, there is hope in surveys showing that more Americans would blame Trump and the GOP. For Republicans, the numbers offer this glimmer: In conservative states, the blame would shift to Democrats if the public perceives the immigration issue as the reason for the impasse... The reality that public opinion would probably fall somewhere in between means the public could lose, too, because neither side will have an incentive to surrender — raising the possibility of a prolonged shutdown of government services."
— WH eyes Williams for No. 2. WSJ's Nick Timiraos: "The White House is considering John Williams, the president of the Federal Reserve Bank of San Francisco, as a candidate to serve as the vice chairman of Federal Reserve Board in Washington, according to people familiar with the matter. Mr. Williams succeeded Fed Chairwoman Janet Yellen as the San Francisco Fed leader in 2011, after Ms. Yellen was tapped by President Barack Obama to serve as the Fed’s vice chairwoman in 2010. Mr. Williams previously served as the bank’s research director, reporting to Ms. Yellen, and would fit the Trump administration’s interest in filling the vice chairman post with someone who is a widely respected expert in monetary economics. Mr. Williams joined the San Francisco Fed in 2002 and previously served as a senior economist for the Fed board in Washington, joining the central bank in 1994."
— Two other slots could challenge Trump. NYT's Binyamin Appelbaum: "The Federal Reserve is facing a significant change in leadership that goes beyond the installation of a new chairman. It is also awaiting the appointment of two other top officials who will play a crucial role in shaping Fed policy... Trump, who has already nominated Jerome H. Powell as the Fed’s next chairman, also gets to pick a new vice chairman. But the other open position, the presidency of the Federal Reserve Bank of New York, is not Mr. Trump’s choice to make. The New York Fed chooses its own president, a position that is often described as the second-most powerful at the Fed. The regional bank is responsible for implementing the Fed’s monetary policy decisions — raising or lowering interest rates through the purchase and sale of financial assets — and it oversees many of the nation’s largest financial institutions. Some of Mr. Trump’s political opponents see an opportunity to fill that opening with a counterweight to the president’s economic agenda."
Trump delivered a speech Thursday in Coraopolis, Pa., aimed in part at touting his tax overhaul. Here are the highlights, in three minutes:
— Goldman sees itself out. NYT's James B. Stewart: "A year ago, with an impressive roster of Goldman Sachs alumni on their way to top White House positions, the return of 'Government Sachs' was in full swing. The newly inaugurated President Trump tapped Steven T. Mnuchin as treasury secretary, Gary D. Cohn as director of the National Economic Council and Dina Powell as White House adviser. Ms. Powell later served as both deputy national security adviser for strategy and senior counselor for economic initiatives. Anthony Scaramucci, another Goldman alumnus, was on the transition team en route to the post of White House communications director months later. Outranking them all was Stephen K. Bannon, the chief White House strategist, who worked at the bank early in his career and who reported directly to the president.
Depending on one’s point of view, this was either a sellout to Wall Street by a president who had railed against Goldman during the campaign, or a welcome check on some of Mr. Trump’s more radical tendencies... Now, the verdict would appear to be in: Mr. Trump remains the impulsive, freewheeling provocateur in chief, and much of the Goldman contingent has been banished or is leaving the White House."
— Fusion: Trump's financial straits raised questions. Bloomberg's Billy House: 'The founder of Fusion GPS, the opposition research firm that produced an unsubstantiated dossier about Donald Trump, told a House panel that Trump’s financial practices raised allegations of possible business ties to Russian and other organized crime figures. According to a transcript released Thursday by the House Intelligence Committee of its closed-door November interview, Glenn Simpson said he became intrigued by Trump’s past difficulties obtaining loans from banks while looking for negative information during the president’s 2016 campaign.
'We were always trying to figure out where -- how he was financing various things,' Simpson told the committee. By 2004, Simpson added, 'Donald Trump was not able to get bank credit and if you’re a real-estate developer and you can’t get bank loans, you know, you’ve got a problem.' But Simpson didn’t provide concrete evidence during the interview to back up the allegations of links with organized crime, noting he lacked the subpoena power the committee has to dig deeper."
(Politico includes the full document here.)
— Morgan Stanley profits off due to tax bill. AP's Ken Sweet: "Morgan Stanley’s earnings fell 59 percent in the fourth quarter, the company said Thursday, as the investment bank had to book $990 million in charges related to the new tax law. Morgan Stanley earned $686 million, or 29 cents a share, down from $1.67 billion, or 81 cents a share, from a year earlier. Excluding the tax charges, the earnings rose to 84 cents a share, beating analysts’ forecasts, from 74 cents. Like other banks, Morgan Stanley had to write down the value of its deferred tax assets, which are effectively tax credits the bank stockpiled after the financial crisis. The lower corporate tax rates under the new law lowered the value of those assets."
— Bonuses, not wage hikes. The Post's Jena McGregor: "Human resources experts and economists say they are not surprised one-time bonuses are getting more play in response to the tax cut for several reasons. For one, bonuses are easier for employers to hand out than bumps in base pay because they don't increase a company's fixed costs... It also reflects a long-term trend in how compensation for rank-and-file employees has been paid: For more than two decades, employers have increasingly allocated more of their payroll budgets to discretionary bonuses and less and less to paying increases in salaries. In 1992, said Abosch, spending on 'variable pay' was just 5.7 percent of employers' payroll budgets, and salary increases were 4.6 percent. Today, those numbers are 12.7 percent and just 2.9 percent, respectively."
— Bad news for affordable housing. NYT's Conor Dougherty: "The last time that Congress approved a sweeping overhaul of the federal tax code, in 1986, it created a tax credit meant to encourage the private sector to invest in affordable housing. It has grown into a $9 billion-a-year social program that has funded the construction of some three million apartments for low-income residents. But the Republican tax plan approved last month amounts to a vast cutback, making it much less likely that such construction will continue apace. Because the tax rate for corporations has been lowered, the value of the credits — which corporations get in return for their investments — is also lower."
— Small liberal arts colleges take a hit. WSJ's Richard Rubin and Andrea Fuller: "The Juilliard School, New York’s magnet for aspiring artists, is bracing for a 1.4% tax on income from its $1 billion endowment. Three miles away, Columbia University and its $10 billion endowment will remain untouched for now. A college-endowment tax, enacted in December in the Tax Cuts and Jobs Act signed by President Donald Trump, is causing confusion and frustration at schools across the country, which rely on the previously tax free-earnings when setting their budgets. Small liberal arts colleges will likely be hit disproportionately because many have sizable endowments but limited enrollment. The tax applies only to private schools with at least 500 students and at least $500,000 of investments per student."
— Apple tops Fortune's most admired companies list. Fortune's Alan Murray: "Great reputations are hard to build, but it turns out they are also hard to lose. That’s why Fortune’s World’s Most Admired list, which ranks companies based on their reputation among other business leaders, shows such stability from year to year. Top of the list this year, for the 11th year in a row, is Apple. No. 2, for the second year running, is Amazon. Alphabet, Berkshire Hathaway, and Starbucks fill out the top five. But while reputations are hard to lose, it’s not impossible. GE dove out of the top ten this year, plummeting from No. 7 to No. 30. On the upside, both Adidas and Lockheed Martin broke into the top 50 for the first time."
The top ten:
- Berkshire Hathaway
- Walt Disney
- Southwest Airlines
- JPMorgan Chase
— SEC cools on bitcoin ETFs. WSJ's Dave Michaels and Asjylyn Loder: "Wall Street’s top regulator on Thursday all but shut the door to approving exchange-traded funds that hold bitcoin and other cryptocurrencies, questioning whether the products could comply with rules meant to protect mom-and-pop investors. The Securities and Exchange Commission outlined its views in a letter to two Wall Street trade groups whose members envision the profits that could flow from selling exposure to bitcoin through popular investment vehicles such as ETFs and mutual funds. The SEC questioned how bitcoin’s volatility and potential illiquidity would fit with funds that must calculate a fair market price for their portfolio at the end of every trading day and allow investors to easily cash out their shares."
— Mulvaney requests no funding for CFPB. Politico's Michael Grunwald: "Every quarter, the Consumer Financial Protection Bureau formally requests its operating funds from the Federal Reserve. Last quarter, former director Richard Cordray asked for $217.1 million. Cordray, an appointee of President Barack Obama, needed just $86.6 million the quarter before that. And Wednesday, President Donald Trump’s acting CFPB director, Mick Mulvaney, sent his first request to the Fed. He requested zero. In a letter to Fed Chair Janet Yellen obtained by Politico, Mulvaney wrote that the bureau has $177 million in the bank, enough to cover the $145 million the bureau has budgeted for its second quarter. Cordray had maintained a 'reserve fund' in case of overruns or emergencies, but Mulvaney said he didn’t see any reason for it, since the Fed has always given the bureau the money it needs. Mulvaney, who is also Trump’s budget director, noted that instead of advancing the funds to the bureau, the Fed could return them to the Treasury and reduce the deficit."
Here's what party was in power during the most recent government shutdowns via CQ Roll Call's Gillian Roberts:
The blame game over the shutdown showdown is already starting. For the record, here's the party control of the chambers of the last 4 shutdowns: https://t.co/Fr08tZHyFT @rollcall pic.twitter.com/vlayFDyeDl— Gillian Roberts (@gkroberts) January 18, 2018
- The SEC-NYU Dialogue on Securities Markets – Shareholder Engagement will be held in New York.
From the New Yorker:
House Minority Leader Nancy Pelosi compared the GOP's continuing resolution with "a bowl of doggy doo":
Trump's many potential conflicts of interest, explained:
Fact-checking Trump’s "Fake News Awards:"
Jimmy Kimmel talks about a potential government shutdown and funding CHIP: