Republicans and Democrats are in no mood to settle their divide over immigration policy and come to an agreement to fund the government. Thus, the government closure will go into a third day and such a shutdown is expected to damage growth.
All these have boosted the risk of greater fluctuations in the equity market that have largely scaled higher in recent years. With the markets apprehending a pullback after a strong run, investing in sound stocks that are unperturbed by market gyrations seems judicious.
Government Shutdown to Go Into Third Day
Stock futures are tumbling after the government remained shut down. The Bill that could have kept the government funded through Feb 16 was voted down in the Senate. This shutdown is expected to continue into Monday, as the ruling party and the opposition failed to strike a deal before the work week began in Washington. A million federal workers are not expected to go to work if the shutdown lingers.
The Republican-led Senate was quick to blame the Democrats post the shutdown. The Democrats have almost opposed all the GOP proposals needed to keep the government running. They have withheld their support until issues related to immigration, healthcare, disaster relief and military spending are sorted. The Democrats, especially, want an assurance from Senate Majority Leader Mitch McConnell to put a bipartisan immigration bill up for vote, regardless of President Trump’s preference.
Meanwhile, Trump, has expressed his displeasure toward the Deferred Action for Childhood Arrivals (DACA), an Obama-era immigration policy. He has repeatedly blamed the Democrats for such an executive order. The President argued that such a policy isn’t adequate and demanded a merit-based system of immigration as well as funding for a border wall with neighboring state Mexico.
Nevertheless, McConnell assured that the government is intended to look into issues related to the DACA. He also intends to take up issues related to defense spending and disaster relief as they are crucial.
However, it is to be seen how such intentions will be sufficient for the Democrats to support the stopgap spending bill on Jan 22. After all, the Republicans desperately need a 10 or more Democratic vote in the Senate to pass such a spending legislation, with currently 50 members present. Lest we forget, Sen. John McCain is receiving cancer treatment and is away from Washington.
A Longer Shutdown to Hurt Economy
Government shutdowns are primarily the cause of dispute over government spending. But, this time, it was caused by ideological differences on immigration. This is potentially disruptive as both the parties are fighting over an issue that has deep significance to their core supporters. Thus, the risk that the partial government shutdown could be actually a long one has increased. In turn, this may hurt the broader economy, bringing the recent growth spurt to an abrupt end.
Shutdowns generally reduce the economy’s productive work hours and revenues from daily fees at museums and parks. Issuing federal checks, permits and licenses slows down, which hampers the rest of the economy, affecting export and import permits. It also affects mortgages and small business loans.
Private sector companies that deal with the government have their works temporarily unsettled, while travel outlays are reduced, affecting local economies. Overall, government funding crisis hampers business optimism and consumer confidence.
How to Play the Shutdown? 4 Solid Picks
This government shutdown can wreck havoc in the market. Historically, the Cboe Volatility index (VIX) averages a return of 9.7% one week after a government shutdown, while the S&P 500 declines 0.3%.
Investors, thus, should build a strategy on low-risk assets. The best way to go about doing this is by creating a portfolio of low-beta stocks, which are inherently less volatile than the markets they trade in. In this case, a low beta ranges from 0 to 1.
These stocks are also undervalued, which makes them cheap. Further, these stocks flaunt a Zacks Rank #2 (Buy).
Sally Beauty Holdings, Inc. (SBH - Free Report) along with its subsidiaries operates as a specialty retailer and distributor of professional beauty supplies. The company has a beta of 0.65. Sally Beauty Holdings has a price-to-earnings (P/E) ratio of 9.23, below the industry’s 19.1, implying that the stock is quite a bargain. The company’s projected growth rate for the current year is 11.7%, higher than the industry’s rise of 9.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Macy's, Inc. (M - Free Report) , together with its subsidiaries, operates stores, Websites, and mobile applications. The company has a beta of 0.97. It has a price-to-earnings (P/E) ratio of 7.44, below the industry’s 17.9. The company’s projected growth rate for the current year is 15.8%, in contrast to the industry’s projected decline of 6.3%.
Alliance Holdings GP, L.P. , together with its subsidiaries, produces and markets coal primarily to utilities and industrial users in the United States. The company has a beta of 0.51. Alliance Holdings has a price-to-earnings (P/E) ratio of 7.83, below the industry’s 53.8. The stock, which is part of the Coal industry, is expected to give a positive return of 1.3% this year.
Natural Resource Partners L.P. (NRP - Free Report) , through its subsidiaries, owns, operates, manages, and leases mineral properties in the United States. The company has a beta of 0.7. It has a price-to-earnings (P/E) ratio of 7.62, below the industry’s 53.8. The stock is expected to give a return of 8.8% and more than 100% in the current and next quarters, respectively.
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