/perspectives/global-cio-outlook/buying-the-shutdown

Buying the Shutdown

Volatility from the government shutdown and other political developments in Washington D.C. will likely continue to rise. Despite this, the reduction in output from this will be short-term, and investors still have several attractive options for deploying capital across asset classes in the United States and globally.

October 01, 2013    |    By Scott Minerd

Global CIO Commentary by Scott Minerd

The U.S. government has shut down 17 times since 1976, but the current brinksmanship unfolding in Washington has the potential to last longer and have a more pronounced effect on markets than previous examples. Uncertainty over the drama on Capitol Hill is leading to higher volatility, but weakness in asset prices likely represents a buying opportunity. There are also favorable investment options outside of the United States, which will benefit from ongoing loose monetary conditions. There is little incentive for either the Democrats or Republicans to agree to a budget deal before October 17th, the forecasted date when the debt ceiling will need to be raised. Because the U.S. government is no longer spending, there is also a chance that this date could move further out on the horizon. The consensus estimate is that each week of the shutdown will reduce 4Q GDP by 25 basis points, meaning that fourth quarter growth could be up to 75 basis points lower by the time the shutdown is over. This is especially significant given that the expectation for 4Q GDP is only currently around 2.5 percent. Having said this, there is no risk that the U.S. Treasury will default in the coming weeks. Importantly, these political headwinds represent relatively isolated shocks to GDP, and their effects will likely recede fairly quickly given the torque in the underlying economy. Leading indicators show no sign of a recession, and a resurgence in output growth could still occur during the first half of 2014. There are a number of ways for investors to take advantage of the political dysfunction in Washington. Historically, equities rally when uncertainty over a shutdown begins to subside, so there is a case for buying stocks, which have fallen in seven out of the last nine sessions. Stifled growth also means that interest rates have further room to leg down, which is supportive of fixed income assets. Finally, there are abundant opportunities for excess returns outside of the U.S. right now, with both European and emerging market equities offering attractive valuations and improving fundamental outlooks.

Gauging the Impact of Government Shutdowns

There have been 17 U.S. federal government shutdowns since 1976. Excluding drastic moves in commodity prices and bond yields in the late 1970s, analysis of eight occasions during the past 30 years reveals that U.S. equities and the dollar tend to decline during shutdown periods, while gold and commodities tend to perform well. Shutdown periods do not appear to have a significant effect on 10-year Treasury yields. Historically, when a shutdown ends, market performance reverses quickly, and Treasury yields fall by an average of 22 basis points over the following 10 days. The economic impact of a shutdown largely depends on its duration. According to consensus estimates, a week-long shutdown would cut annualized GDP growth by approximately 25 basis points in the fourth quarter.

AVERAGE PERFORMANCE OF SELECTED ASSETS DURING GOVERNMENT SHUTDOWN PERIODS (1983 - PRESENT)

CUMULATIVE NYSE ADVANCE/DECLINE LINE AND THE DOW JONES INDUSTRIAL AVERAGE

Source: Bloomberg, Guggenheim Investments. Data as of 9/30/2013

Economic Data Releases

U.S. Manufacturing Outlook Improves, While Housing and Consumer Confidence Disappoint

  • The ISM manufacturing index showed a faster pace of expansion in September, rising to 56.2, the highest level since April 2011.
  • The ADP private payroll report showed U.S. private sector employment increasing by 166,000 in September, with August data revised down to 159,000.
  • Personal income increased 0.4% in August, in line with expectations. The increase was the largest since February.
  • Pending home sales fell for a third straight month, down 1.6% in August. Three consecutive decreases have not occurred since the end of 2007.
  • Initial jobless claims decreased to 305,000 for the week ended September 21. The four-week moving average is now at the lowest level since June 2007.
  • Second quarter GDP growth remained at 2.5% in the final revision.
  • University of Michigan consumer confidence revised up to 77.5 from 76.8 in the second September reading, but remained at a five-month low.
  • The Dallas Fed manufacturing activity index jumped to 12.8 in September, the best reading since February 2012.
  • The Chicago PMI increased for a third straight month, rising to 55.7 in September.

Inflation Continued to Decline in the Euro Zone Despite Better Economic Confidence

  • Economic confidence in the euro zone improved to 96.9 in September, the fifth consecutive monthly gain and the highest level in over two years.
  • Consumer prices in the euro zone continued to head lower in September, reaching 1.1% year-over-year, the lowest since February 2010.
  • German retail sales rebounded in August after two months of decline, but were below expectations at 0.5%.
  • Unemployment in Germany rose 25,000 in September, the largest monthly increase since 2009.
  • The HSBC China Manufacturing PMI was revised down in the final estimate, showing manufacturing activity inched up from 50.1 to 50.2 in September.
  • China’s official manufacturing PMI accelerated to 51.1, rising for a third consecutive month in September.
  • Japan’s CPI rose a more-than-expected 0.9% year-over-year in August, the highest amount since November 2008. Core prices, however, remained in deflation at -0.1%.
  • The Tankan index of large manufacturers in Japan rose to 12 in the third quarter survey, the best reading since 2007.
  • Japanese industrial production fell more than expected in August, down 0.7%.
  • Retail sales in Japan rose 0.9% in August after falling for two months.
 

FEATURED PERSPECTIVES

October 29, 2018

Forecasting the Next Recession: The Yield Curve Doesn’t Lie

Our Recession Probability Model and Recession Dashboard continue to suggest a recession is likely to begin in early 2020. Investors ignore the yield curve’s signal at their peril.

October 15, 2018

Beneath the Tide of Rising Earnings

Factors that have contributed to strong earnings growth this year will fade in 2019 and turn into headwinds in 2020, exposing leveraged corporate borrowers.

August 20, 2018

Tail Risks Are Getting Fatter

While the U.S. economy remains on solid footing, exogenous risks threaten asset values, market confidence, and the strength of the U.S. economy.


VIDEO

Forecasting the Next Recession 

Forecating the Next Recession

Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”

Macro Themes to Watch in 2018 

Macro Themes to Watch in 2018

In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”







Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.

Investing involves risk, including the possible loss of principal.

Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.

© Guggenheim Investments. All rights reserved.

Research our firm with FINRA Broker Check.

• Not FDIC Insured • No Bank Guarantee • May Lose Value

This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.