A few days ago, the current US government shutdown became the largest in history, but still, those people trading the stock market are questioning why the sentiment had not been deteriorated by the political uncertainty in Washington.
Three consecutive weeks of gains
Although there was no sign of agreement between the democrats and republicans, with demand for a border wall funding keeping the negotiations frozen, the stock market had rallied since December 26th of 2018 and had closed three weeks in a row with substantial gains.
Even though people trading the stock market found this bizarre, there are three explanations justifying the market ignoring the political debacle:
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Extreme oversold conditions: all three US major indices had topped out in the end of September 2018 and then dropped by almost 20%, top tick to bottom tick. Although the shutdown took place, the market was already in deeply oversold territory and a technical bounce was inevitable.
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Progress on trade war: the meeting between the US and Chinese officials, which took place between January 7-9, provided some short-term relief, as both sides showed commitment to reach an agreement before the 90 days deadline will expire. It seems like meetings at a much higher level could take place at the end of January, according to the Secretary of Treasury Steven Mnuchin.
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Earnings season for Q4: from a seasonal point of view, the last quarter of the year is the most profitable due to the holiday season. As of January 14th, the earnings season kicked in and companies are now beginning to publish their results.
Will the shutdown have an impact?
There’s little worry about it right now, mainly because the shutdown is only partial. Several parts of the government are still functioning, and it is hard to approximate accurately the impact on the GDP numbers. According to the latest FOMC statement, the median forecast for GDP growth in 2019 is estimated at 2.3%.
If the shutdown will be in for a long period of time, as the US President had threatened, the implications in terms of economic output will not be avoided. Right now, no side is open for compromise and we should expect market participants to become increasingly worried about the situation.
The US President Donald Trump had already canceled its trip to the World Economic Forum in Davos, Switzerland, showing that he wants to continue negotiating with the Democrats, but unless he will be able to temporarily give up on his border wall demands, there’s no end in sight.
