We are forecasting net profit margins for tech companies to contract. With the government shutdown now in its fourth week (the longest ever) and 800,000 federal workers on furlough, the risk of recession has increased significantly. The shutdown occurred due to lack of 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.
This is especially true as it has started to hurt the economy with the average pay loss being $5,000 for 800,000 federal employees. This has resulted in lower consumer spending and investment. Additionally, U.S. tax refunds and mortgage applications have been delayed, hampering the housing sector. Public companies are struggling to get approval to raise capital and the Food and Drug Administration delayed approval of drugs and medical devices.
The Trump administration has doubled the cost of the government shutdown. It now projects the closure will subtract 0.1 percentage point from growth every week compared with the previous projection of 0.1 percentage point reduction every two weeks. Jamie Dimon, the CEO of J.P. Morgan Chase, believes that the partial shutdown could wipe out growth from the world’s biggest economy if it continues through the first quarter of the year.
Apart from the shutdown, U.S.-China trade tensions and global growth worries added to fears of recession. Additionally, growth in the world’s biggest economy has started to slow down as gauges of manufacturing and consumer sentiment have fallen in the recent weeks.
Deutsche Bank warns that the combination of the U.S.-China trade war and government shutdown may result in recession as soon as this year. According to a new survey of chief executives from the Conference Board, the possibility of a global recession ranks as the top concern on the minds of corporate leaders as they head into 2019. Analysts surveyed by Bloomberg put the risk of a U.S. recession at the highest in more than six years. They see a 25% chance of a slump in the next 12 months, up from 20% in the December survey.
Against such a backdrop, we are currently long US treasuries.
Source: Zacks Research