Equities Facing Heightened Volatility if National Emergency Declared Over Government Shutdown

These are the two major issues investors will be facing next week with the U.S. government shutdown likely to have the greatest impact on the price action. Conditions could get particularly volatile if President Trump declares a national of emergency.
James Hyerczyk
Volatility

The major U.S. equity markets finished lower on Friday, but still managed to post solid weekly gains despite growing concerns over the U.S. government shutdown and worries over an economic slowdown in China. On the data front, U.S. consumer prices fell for the first time in nine months in December amid a steep drop in gasoline prices.

In the cash market, the benchmark S&P 500 Index settled at 2596.26, down 0.38 or -0.01%. The blue chip Dow Jones Industrial Average closed at 23995.95, down 5.97 or -0.03% and the tech-based NASDAQ Composite finished at 6971.48, down 14.59 or -0.21%.

It was a relatively quiet week with volume and volatility at subdued levels. The S&P 500 Index went five sessions without a move greater than 1 percent in either direction, the longest quiet streak since early October for the benchmark. However, this could just be the calm before the storm.

Bargain hunters continued to support the S&P 500 Index and Dow Jones Industrial Average with both posting their first three-week winning streak in five months. The tech-driven NASDAQ Composite was supported by the aggressive buying of beaten up stocks including a few of the FAANGS. Amazon and Facebook gained more than 4 percent for the week. Netflix was a big winner, jumping more than 13 percent for the week.

U.S. Federal Government Shutdown About to Get Uglier

The U.S federal government has now been partially shut down for a record number of days and this news is stoking fears that it could drag on for much longer. While President Trump was announcing he wouldn’t attend the annual World Economic Forum at Davos, Switzerland, thousands of government workers went without paychecks for a third week.

Analysts warned that every two weeks of shutdown trims 0.1 percentage points from growth. Additional losses are also likely to be felt in spending and investment.

Trump ended the week by saying he will “probably” declare a national emergency if the White House and Congress cannot reach a deal to end the ordeal.

New Concerns Over Possible Slowdown in China

Earlier in the week, three days of trade negotiations between the United States and China brought a positive vibe to the markets although there were still some major challenges to overcome. While this news may have helped underpin prices, putting a lid on gains were concerns over a potential slowdown in China’s economy.

The first red flag was raised by Apple the previous week after it slashed its revenue guidance for fiscal first quarter. Starbucks was the next company to warn of a slowdown in China. There are also grumblings that McDonald’s may be the next.

Furthermore, on Thursday, Federal Reserve Chairman Jerome Powell said that warnings show the Chinese economy is slowing. “It’s showing up a lot in consumer spending,” Powell said. “Weak retail spending; everyone has seen the Apple news.”

Carryover into Next Week

These are the two major issues investors will be facing next week with the U.S. government shutdown likely to have the greatest impact on the price action. Conditions could get particularly volatile if President Trump declares a national emergency.

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