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Investors are just starting to appreciate the serious economic implications from a prolonged partial shutdown of the U.S. government.
In fact, JPMorgan Chase CEO Jamie Dimon has warned that U.S. GDP could be reduced to zero in the first quarter if this partial shutdown continues significantly longer. Also, amid fears of a lapse in paychecks to government workers, more attention has been focused on the fact that four out of five U.S. workers live without a savings safety net.
Read: White House doubles estimates of shutdown impact on GDP: CNBC
Unfortunately, there doesn’t seem to be any end of this record-long shutdown in sight. And even if a short-term bill manages to provide funding, history shows these fights are a regular occurrence and another shutdown is far more likely than a long-term solution.
So is there anything investors can learn from the current mess to make their portfolio shutdown-proof?
While admittedly there are no stocks 100% tied to U.S. federal spending trends, there are several trades that are likely to do well even in the event of another funding lapse — and several obvious victims suffering headwinds amid the political infighting.
Shutdown-proof: Senior housing REITs
Despite demographic tailwinds from an aging Baby Boomer population, things haven’t been great for senior housing REITs in the last few years. There are a bunch of reasons for this, including adverse implications from the 2017 corporate tax cuts and rising interest rates that translate into increasing borrowing costs, but a key risk has also been a fear of cuts to federal reimbursement rates.
But thanks to a failed Obamacare repeal in 2017 and dissension from far-right legislators derailing then-House Speaker Paul Ryan’s plans for a Medicare overhaul, it has become clear that any hope of a coordinated GOP effort to alter reimbursement rates to senior housing facilities is just not going to happen.
Given attractive valuations now that priced in those prior challenges, the time may be right for senior housing. After all, federal medical spending will always keep flowing even if “discretionary” government spending is curtailed during a shutdown. The income potential of stocks like National Health Investors
NHI, +0.79%
and Welltower Inc.
WELL, +1.71%
also could be attractive if the current risk-off environment continues.
Shutdown victim: Rest of housing
Housing was already looking pretty shaky for investors in 2019, with the broad-based SPDR S&P Homebuilders ETF
XHB, -0.20%
down about 20% or so in the last 12 months. There are a host of reasons behind that, including rising interest rates putting already pricey homes out of reach of many borrowers and a hints of cyclical slowdown and rising uncertainty among prospective buyers.
The shutdown makes things go from bad to much worse in housing, however. The National Association of Realtors surveyed more than 2,200 agents and found 1 in 5 potential buyers have been adversely impacted by the shutdown. Some were federal employees who saw funds dry up, others thought the shutdown was exemplary of market uncertainty and backed out, and many more simply couldn’t close on time thanks to delays and other problems with loans associated with federal programs.
Most investors already noticed that the housing sector was in trouble. Big pains in January thanks to a government shutdown will compound that trouble and makes stocks in the sector like Toll Brothers
TOL, +1.15%
and PulteGroup
PHM, +0.75%
incredibly risky bets for the foreseeable future.
Shutdown-proof: Defense stocks
That the fiscal 2018 federal budget saw dramatic cuts at several government agencies but a massive increase in military spending tells you everything you need to know about Republican priorities through 2020. And while the bulk of the gains for defense stocks were logged in 2017, including a massive 88% gain for Boeing
BA, +0.54%
it may be worth giving this sector another look.
For starters, consider that Boeing’s stock is only down about 2% in the last three months while the broader S&P 500
SPX, +1.07%
has lost about 6%. Also consider that despite high-profile troop withdrawals at the end of 2018, Trump has (predictably) contradicted views that the administration would be letting off the gas on military spending and pledged another bump in spending during a visit to Iraq after Christmas.
And of course, military spending cannot be curtailed through funding lapses since it is an essential part of the government. That adds stability to these stocks regardless of any political impasse.
Shutdown victim: Enterprise tech
Perhaps the hardest hit of all will be midcap tech stocks that have a few lucrative federal contracts but may not be able to secure new deals or win new business as a result of the shutdown. For instance, Morgan Stanley analysts highlighted cybersecurity firm ForeScout
FSCT, +1.32%
as a likely victim of the current funding mess since it derives almost 30% of revenue from government contracts. There’s not a lot of wiggle room in stocks like this that heavily reinvest any sales in growth plans, so even a small hiccup in payments could create big trouble.
We admittedly don’t have to hold a bake sale for deep-pocketed tech giants like Microsoft Corp.
MSFT, +2.90%
and Oracle Corp.
ORCL, +0.81%
amid the government shutdown. However, it’s noteworthy how big federal contracts are increasingly important to the bottom line for them, too.
Case in point: IBM
IBM, +1.11%
made a $34 billion deal to buy enterprise software firm Red Hat Inc.
RHT, +0.43%
in October in part because Red Hat is adept at winning federal contracts. If investors are looking for a quick ROI on that transaction, the shutdown could throw a monkey wrench into things.
Shutdown-proof: Gun stocks
It’s a sad commentary, but publicly traded gun companies are increasingly looking attractive amid a government shutdown. That’s because firearm marketers can do a brisk business with the political football caused by divided government right now.
When there’s chaos in the government, what’s more comforting than a warm gun? When Democrats hold power in Congress, what’s more compelling than a hysterical ad claiming Nancy Pelosi is coming to get your guns?
I’m not saying any of this is good for society. But it sure is effective if you want to sell guns, as evidenced by the record gun sales recorded under President Obama.
After Trump was elected in 2016, America’s gun nuts chilled out a bit and firearm stocks like Sturm Ruger & Company
RGR, -0.75%
Vista Outdoor
VSTO, -1.92%
and American Outdoor Brands
AOBC, -1.11%
saw sales soften up and their shares fall sharply. But things have stabilized lately — and with the shutdown featuring folks like Parkland survivor David Hogg pointing out the true emergency in the U.S. is gun violence and not illegal immigrants, you can be sure gun stocks will keep moving higher in the near term.
Shutdown victim: Capital markets and fintech
There has been chatter of a good year for 2019 IPOs, with venture-funded unicorns Airbnb, Pinterest and Uber all eyeing a debut. However, with the Securities and Exchange Commission closed and unable to work on any applications, you can be sure that’s going to push back those plans significantly.
That’s not just bad for startups looking to raise money, but for deal makers like Goldman Sachs
GS, +0.67%
and Morgan Stanley
MS, +0.94%
that do a brisk business by advising on such deals, both via fees as underwriters but also as gatekeepers who keep their best clients happy with access to these high-profile deals.
Similarly, new fintech firms that rely on guidance from regulators at the SEC or Treasury Department aren’t going to get their phone calls returned, and as a result will see difficulty testing and deploying new ideas. There were already concerns about a lack of regulatory clarity on next-generation financial products like cryptocurrencies, but a shutdown makes the environment even more hostile to these firms.
It’s not just a problem for startups. Publicly traded companies like LendingClub
LC, +0.67%
and Square
SQ, +1.20%
are increasingly are looking to disrupt traditional financial services to find paths to growth, and need access to government regulators to achieve that.
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