Weekly Update 09/26/2023
Government Shutdown?
A Shutdown is Days Away. What’s at Stake?
Ford Pauses Work on $3.5B EV Factory!
AI: Micron Earnings Tomorrow!
Outrage: U.S. Taxpayers Subsidizing Small Businesses in Ukraine, As Americans Struggle to Pay Bills
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—Market Madness—
Here’s what analysts see in store for stocks as the US government barrels towards a shutdown
The US government looks it’s headed for a shutdown as policymakers reach an impasse on the nation’s budget for the next fiscal year. But the stock market’s top strategists aren’t much fazed by that possibility and there’s a high chance investors could come out of the situation doing just fine, experts say.
To avoid a shutdown, Congress needs to pass all 12 of its spending bills for the next fiscal year by September 30, something it’s historically been quite bad at. The last time it passed all of its spending bills on time was in 1997, according to an analysis from Charles Schwab.
The odds of a shutdown have already surpassed 50%, according to Goldman Sachs Research chief political economist Alec Phillips, with so far zero spending bills passed as policymakers spar over government budget constraints.
That can spell trouble for the market, which could take an immediate hit from a shutdown event. Stocks in September are already on track to post their worst monthly losses since the start of the year. And the last time Congress failed to strike a deal over the budget in time, the S&P 500 dropped 2.7% on the first day of the shutdown, according to Renaissance Macro data.
But there are promising signs that investors will be able to quickly recover any losses.
In the past 20 government shutdowns, the S&P 500 stayed relatively flat, with the benchmark index losing an average 0.4% the week before a shutdown and gaining .1% by the end of a shutdown, according to a Reuters analysis of CFRA Research data.
And in some cases, stocks actually ended the shutdown period higher, with the market gaining a net 10% following the 2018-19 shutdown, according to Renaissance Macro.
Shutdowns lasting five days or more have also been known to see a quick market rebound, according to a 2021 Dow Jones analysis. On average, the S&P 500 had already moved into positive territory within one month of the shutdown. Shutdowns themselves are also relatively short. The last government shutdown, which was the longest-ever, lasted for 35 days.
Rising recession risk
Though a shutdown might not be a significant drag on the market, analysts are concerned it could exacerbate other factors weighing on the US economy in the coming quarter. That includes a weakening labor market, rising interest rates, and the resumption of student loan payments, which could pinch American consumers and hike the chances of a downturn.
A shutdown could weigh on economic growth, dragging down year-over-year quarterly GDP by 0.2 percentage points per each week it lasts, Goldman Sachs estimated. The bank said it expected a shutdown to last two to three weeks.
“I think the government shutdown itself isn’t a major issue from a stock market perspective,” Truist co-chief investment officer Keith Lerner said to CNBC on Monday. “But I think the challenge for the market right now isn’t any one thing, it’s all the obvious things we’re talking about,” he said, adding that stock right now are lacking “upside” catalysts.
Fed is underestimating how quickly it’ll hit 2% inflation target, says JPMorgan’s Gabriela Santos
Ford pauses work on $3.5 billion EV battery plant in Michigan
Ford Motor Co. said late Monday it has halted work on a $3.5 billion battery factory in Michigan, just days after the carmaker made concessions to its striking workers.
“We’re pausing work and limiting spending on construction on the [Marshall, Mich.] project until we’re confident about our ability to competitively operate the plant,” a Ford F, +1.21% spokesperson said. “We haven’t made any final decision about the planned investment there.”
Ford said in February it was investing $3.5 billion to build the facility in Marshall, about 100 miles west of Detroit. The plant, which Ford called BlueOval Battery Park Michigan, is part of Ford’s “commitment to American manufacturing,” the company said then.
The plant was expected to employ about 2,500 workers at the start of production, scheduled for 2026. The $3.5 billion investment is part of Ford’s commitment to invest more than $50 billion in electric vehicles globally through that year.
Employees in some parts of a Michigan Ford plant making Broncos and Rangers have been on strike since Sept. 14, part of a first wave of United Auto Workers’ labor action also hitting one plant each of General Motors Co. GM, +1.47% and Stellantis NV STLA, -0.57% after the union’s contract expired without progress in the negotiations.
The UAW on Friday expanded the strike to 38 GM and Stellantis distribution centers across 20 states, but didn’t extend the labor action at Ford because it said it had won some concessions for the automaker, such as a return of cost-of-living adjustments.
Ford was showing the UAW that it was “serious about reaching a deal,” union leadership said at the time.
The strike comes at a time the legacy automakers are stretched thin to make investments in EVs, with batteries an especially critical — and pricey — components.
Report: U.S. Taxpayers Subsidizing Small Businesses in Ukraine, Including Designer Knitwear
While everyday American taxpayers are battling inflation and struggling to make ends meet, their money is subsidizing small businesses in Ukraine, according to a recent report on CBS News’s 60 Minutes.
In addition to at least $43 billion in military aid, the U.S. has pumped nearly $25 billion of non-military aid into Ukraine’s economy since the Ukraine War began in February 2022, according to the report.
Some of that U.S. taxpayer money has been going to prop up “small businesses,” such as a designer knitwear company in Ukraine’s capital, far from the frontlines.
The owner of the knitwear company, Tatiana Abramova, told CBS News, “Especially in the condition of war, we have to work.”
“We have to pay taxes, we have to pay wage, salary to our employees. We have to work, don’t stop,” she said.
When asked how supporting Ukraine’s economy would help it win the war, Abramova responded, “Because economy is the foundation of everything.”
According to CBS News, the United States Agency for International Development even helped Abramova find customers overseas.
The report said her company supports more than 70 employees and their families.
Abramova told CBS News, “We realize that it’s the aid from government, but it’s the aid from the heart of every ordinary American person.” She said she felt “Grateful. Great.”
This is happening as Americans struggle to make ends meet, according to a Sunday Bloomberg report:
Inflation has cooled down from a year ago, but that’s failing to allay the pain of Americans who are still paying up at gas pumps and grocery aisles.
As a result, there’s a growing disconnect between policymakers, who point to cooling inflation indicators as a sign of progress, and people who are struggling to make ends meet. Even as the Federal Reserve’s favored measure of price gains eases, the cost of food, gasoline, car insurance and other essentials is still elevated after two years of persistent increases. The rate of core inflation stands at 4.3%.
—REAL ESTATE WORLD—
Downtowns are dead, dying or on life support, says expert with over 50 years of researching urban policy
The hollowing out of U.S. cities’ office and commercial cores is a national trend with serious consequences for millions of Americans. As more people have stayed home following the COVID-19 pandemic, foot traffic has fallen. Major retail chains are closing stores, and even prestigious properties are having a hard time retaining tenants.
The shuttering of a Whole Foods market after only a year in downtown San Francisco in May 2023 received widespread coverage. Even more telling was the high-end department store Nordstrom’s decision to close its flagship store there in August after a 35-year run.
In New York City, office vacancy rates have risen by over 70% since 2019. Chicago’s Magnificent Mile, a stretch of high-end shops and restaurants, had a 26% vacancy rate in spring 2023.
A recent study from the University of Toronto found that across North America, downtowns are recovering from the pandemic more slowly than other urban areas and that “older, denser downtowns reliant on professional or tech workers and located within large metros” are struggling the hardest.
Over more than 50 years of researching urban policy, I have watched U.S. cities go through many booms and busts. Now, however, I see a more fundamental shift taking place. In my view, traditional downtowns are dead, dying or on life support across the U.S. and elsewhere. Local governments and urban residents urgently need to consider what the post-pandemic city will look like.
Decades of overbuilding
U.S. downtowns were in trouble before the COVID-19 pandemic. Today’s overhang of excess commercial space was years in the making.
Urban property markets are speculative enterprises. When the economy is booming, individual developers decide to build more – and the collective result of these rational individual decisions is excess buildings.
In the 1980s, the Reagan administration allowed a quicker depreciation of commercial real estate that effectively lowered tax rates for developers. With financial globalization, foreign money flowed into the U.S. property sector, especially to very big development projects that could absorb large pools of liquid capital looking for relatively safe long-term investments.
Years of low interest rates meant cheap money for developers to finance their projects. City governments were eager to greenlight projects that would generate tax revenues. In many downtowns, office space now takes up between 70% and 80% of all real estate.
The pandemic push
COVID-19 finally burst this 40-year bubble. During pandemic lockdowns, many people worked from home and became comfortable with virtual meetings. Telecommuting grew as conventional commuting declined. Workers with the resources and job flexibility moved from cities to so-called “zoom towns” where housing was more affordable and parks and outdoor activities were close at hand.