Netflix, Starbucks, and a government shutdown — What you need to know for the week ahead

Markets Reporter
Yahoo Finance

If one of the big market themes of 2017 is that political haggling in Washington, D.C. didn’t move markets, than this past week affirmed that this is alive and well.

The biggest political story all week was the impending government shutdown, which took effect at midnight on Friday.

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And yet the S&P 500 and Nasdaq both finished the week at record highs while the Dow finished above 26,000. With this continuation of their stellar run to start the year, each of the major averages is up better than 5% year-to-date.

Traders and investors have had a lot to be happy about in 2018. And history suggests a government shutdown isn’t likely to derail the rally we’ve seen to start the year. REUTERS/Lucas Jackson
Traders and investors have had a lot to be happy about in 2018. And history suggests a government shutdown isn’t likely to derail the rally we’ve seen to start the year. REUTERS/Lucas Jackson

Ryan Detrick at LPL Financial notes that the median return for the S&P 500 during past shutdowns has been exactly 0%, while the average return is a decline of 0.6%. During the most recent 16-day shutdown in 2013, the S&P 500 gained 3.1%. Economists at Goldman Sachs estimated that each week the government is shut down in the first quarter would take 0.2% off first quarter GDP. This impact, however, would likely be reversed in subsequent quarters.

Meanwhile, Treasury yields continued their recent market higher with the two-year Treasury yield settling above 2.05% and the 10-year Treasury settling at 2.64%, above the 2.63% Jeff Gundlach called out earlier this month as a key level for the benchmark government bond. A sustained move above 2.63%, in Gundlach’s view, could send the 10-year to 3%.

In the week ahead, fourth quarter earnings season will really start to kick into gear as the bulk of S&P 500 earnings are expected out over the next three weeks.

Notable reporters this week should include Netflix (NFLX) on Monday after the close, Johnson & Johnson (JNJ), Travelers (TRV), Procter & Gamble (PG), and Verizon (VZ) before Tuesday’s open, United Technologies (UTX), GE (GE), and Comcast (CMCSA) before Wednesday’s open, Ford (F) and Whirlpool (WHR) after Wednesday’s close, American Airlines (AAL), 3M (MMM), and Caterpillar (CAT) before Thursday’s open, and Starbucks (SBUX) after the market close on Thursday.

Netflix CEO Reed Hastings.
Netflix CEO Reed Hastings.

This week’s big economic highlight is expected to be the first estimate of fourth quarter GDP, due out Friday morning. Economists estimate the U.S. economy expanded at an annualized pace of 3% in the final three months of 2017, but the government’s shutdown jeopardizes the Bureau of Labor Statistics’ ability to release this report as scheduled.

Economic calendar

  • Monday: Chicago Fed national activity index, December (0.25 expected; 0.15 previously)

  • Tuesday: Richmond Fed manufacturing index, January (18 expected; 20 previously)

  • Wednesday: FHFA home price index, November (+0.4% expected; +0.5% previously); Markit flash services PMI, January (54.4 expected; 53.7 previously); Markit flash manufacturing PMI, January (55 expected; 55.1 previously); Existing home sales, December (-1.9% expected; +5.6% previously);

  • Thursday: Initial jobless claims (235,000 expected; 221,000 previously); New home sales, December (-7.9% expected; +17.5% previously)

  • Friday: Fourth quarter GDP, first estimate (+3% expected; +3.2% previously); Personal consumption, fourth quarter (+3.7% expected; +2.2% previously); Durable goods orders, December (+0.9% expected; +1.3% previously)

Consumers like tax cuts

Consumers are feeling good about lower taxes.

The University of Michigan’s first check on consumer sentiment in 2018 saw more than a third of all respondents mention tax reform without being prompted with 70% of these responses indicating a favorable view of the new tax law.

“Tax reform was spontaneously mentioned by 34% of all respondents; 70% of those who mentioned tax reform thought the impact would be positive, and 18% said it would be negative,” said Richard Curtin, chief economist for the survey.

“The disconnect between the future outlook assessment and the largely positive view of the tax reform is due to uncertainties about the delayed impact of the tax reforms on the consumers. Some of the uncertainty is related to how much a cut or an increase people, especially high income households who live in high-tax states, face.”

Overall, consumers had a slightly downgraded view of their outlook for the economy when compared to December while current assessments were largely unchanged. Those who are still unsure whether the impacts from tax reform will be good or bad for their finances are holding back future assessments of the economy.

These numbers, however, largely indicate that the initial take from consumers on what tax reform will mean for the economy is good.

We noted earlier this week that while the largest beneficiaries of the tax cut will be corporation and their shareholders, decisions made by companies to raise wages or pay bonuses following this law’s passage are not insignificant. A bank teller at Wells Fargo (WFC) or a cashier at Walmart (WMT) who sees their hourly rate go up by $1 or $2 an hour will be more likely to spend that additional dollar of income than someone already making six figures. Lower wage workers have what economists call a higher marginal propensity to consume.

These initial wage increases or one-time bonuses are, of course, temporary measures while shareholders are more likely to get a recurring benefit due to permanently lower taxes and permanently higher earnings per share.

But the economic picture for 2018, and perhaps even into the end of decade, clearly shows consumers, corporations, and shareholders are, on balance, bullish on what the new tax law means for their bottom lines.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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