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Longest U.S. Government Shutdown: Likely ETF Winners & Losers

Sanghamitra Saha

The partial federal government shutdown is now officially the longest on record; having turned 24 days on Jan 14. It has now topped the 21-day closure during the Clinton administration that began in December 1995. No progress in passing a spending bill, wherein Trump demanded funding for $5.6 billion for a border wall that is being opposed by the Democrats, is mainly the reason for the shutdown.

However, the proposal has not gained much popularity with 56% against a wall and 39% favoring it. That's almost the same as in December. Per Wall Street Journal, the effects of this shutdown are yet not extensive, but a prolonged standoff would weigh on economic growth.

Shutdowns normally lower the economy’s productive work hours and revenues. Private sector companies that deal with the government are likely to have their works halted for the time being. It will only take two more weeks for the shutdown to cost the economy more than $6 billion — higher the price of Mexico border wall — according to S&P Global Ratings, as quoted on CNBC. The economy probably has seen about $3.6 billion wiped out by last Friday, per S&P.

How Bad Will GDP Growth be Impacted?

Per CNBC, the shutdown in 2013, which continued for 16 days, cut 0.4% out of GDP in the fourth quarter of 2013. So, the latest impasse is going to cost the economy more. J.P. Morgan economists have already reduced their first-quarter 2019 GDP growth forecast by a quarter point to 2%, reflecting the shutdown while Bank of America Merrill Lynch economists lowered 0.1 percentage point from fourth-quarter growth and forecast it at 2.8%.

BofA economists affirmed that their forecast for 2.2% first-quarter growth could see further cutdowns if the government remains closed. Both research houses said shutdowns normally hit the economy by 0.1 to 0.2 percentage point per week.

Below we highlight a few likely losers and winners from the partial government shutdown.

Likely Losers

SPDR S&P Homebuilders ETF (XHB)

Though the fund gained about 8.8% due to dovish Fed minutes and stellar earnings results from KB Home (KBH), home sales could be hurt during the period due to delays in mortgage loans (read: Pending Home Sales Fall in November: Homebuilder ETFs in Focus).

iShares US Consumer Services ETF (IYC)

A partial shutdown of the U.S. government could cut job growth by as much as 500,000 in January and push up the unemployment rate above 4.0% if the gridlock in Washington is fixed before Friday, economists warned, per Reuters. The absence of no pay right now for around 800k furloughed workers could weigh on companies’ firth-quarter sales and consumer ETFs like IYC.

Internal Revenue Service (IRS) is also likely to process tax refunds slower with a reduced workforce, another deterrent to profuse consumer purchases (read: Will Amazon Recover From Q4 2018 Slump? ETFs in Focus).

U.S. Global Jets ETF (JETS)

Along with several research houses like Cowen, we also believe airlines stocks may feel the pinch as government travels are likely to be reduced. Also, scant workforce may cause upheaval in the business.

iShares U.S. Aerospace & Defense ETF (ITA)

Since several aerospace and defense companies are government contractors, the sector may be under slight pressure. Federal contractors could lose “more than $200 million a day in lost or delayed revenues from the partial government shutdown”, based on data compiled by Bloomberg (read: Top-Ranked Sector ETFs & Stocks to Buy for 2019).

iShares Russell 2000 ETF (IWM)

If the GDP estimate for the first quarter declines materially, there could be some panic selling and small-cap stocks and ETFs that depend a lot on the domestic economy may suffer.

Likely Winners

SPDR Gold Trust ETF GLD

Gold is often viewed as a safe haven asset to protect against financial risks, and may perform well on heightened market volatility. Investors should note that the U.S. dollar may come under pressure on subdued economic data originated from a prolonged shutdown. This should give further advantage to gold investing as the metal’s pricing is normally inversely related to the greenback.

iShares 20+ Year Treasury Bond ETF (TLT)        

Heightened uncertainty would bring his safe asset in the limelight. Dimming prospects of a sooner-than-expected Fed rate hike in 2019 would act as another driver (read: Dovish Fed Minutes Should Boost These ETFs).

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