Ben Strubel’s letter to investors for the month of February 2019, titled, “Don’t Panic, But Prepare For Some Weak Economic Data.”
Investors may want to prepare themselves for some not-so-good economic numbers over the next few months. There does not appear to be anything to be concerned about in the long term, but the government shutdown from late December through January likely had a good-sized negative effect on the economy. It was, perhaps, larger than people may have realized.
David Einhorn's Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund's letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
While it was frequently reported that 800,000 workers went without pay for 35 days, what was less frequently mentioned was the 1.2 million contractors who also were not being paid. The shutdown had other negative effects elsewhere in the economy. For instance, one craft brewery was forced to throw away a significant amount of beer because new alcoholic beverage labels were not being approved. So, there were costs outside of the 2 million people who did not receive their pay on time.
People always seem worried that a recession is looming. Over the next few months as economic data is released, you will likely hear and read “experts” saying, “Here it is. A recession is coming.”
When you hear this, you can stay calm. Remember, any negative economic data will include the impact of the government shutdown. We should not be surprised to see data that looks like a significant slow-down (or even recession).
Think about 2 million workers not being paid. That is about 1.3% of the labor force. That is the equivalent of the unemployment rate jumping from the current 4% rate up to about 5.2% for a month.
The good news is that the economic damage is temporary. Now that the shutdown is over, everyone is back to work and being paid. There will be some permanent effects. Although federal employees are getting back-pay, it does not appear contractors will. Other effects of the shutdown can’t be undone. The brewery that had to throw away their beer can’t get it back! It will probably take several months for the economy to recover.
Another bit of short-term negative news is the issue of tax refunds. While there have been delays in processing tax returns because of the shutdown, overall the amount of the average tax refund is down 8% so far. It’s probably too early to draw any firm conclusions, but it’s worth expecting the possibility that tax refunds will track below last year. Although the new tax law overall gave most people more take-home pay, changes to the withholding tables mean that many people who have been seeing slightly larger paychecks throughout the year will have a smaller refund at the end of the year. Tax refunds are an important part of many people’s budgets. For many, it’s the single largest check they get in a year. Many people use it for big ticket items such as a car down payment, a vacation, or new appliances.
Here again, we will not be surprised to see weaker economic data throughout the tax refund season. It’s no reason to be concerned. In total, the tax law helped, not hurt, most Americans. My message is that investors may want to prepare mentally for the stock market to drop due to fears of a recession if consumer spending data remains weak throughout the beginning of the year. Smaller than expected tax refunds likely will be disruption that will balance itself over time as people adjust their budgeting habits.
Over all, the economy still looks healthy. Things look to be recovering after the shutdown. Job growth remains strong, and wages for workers are beginning to show some sustained growth. Remember that consumer spending makes up 70% of the economy. That means the more people are working and the more they are getting paid, the stronger the economy gets!
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