Crockett: ‘I see the government shutting down’ in January

Rep. Jasmine Crockett (D-Texas) warned that lawmakers are unlikely to pass the remaining 12 appropriations bills before the Jan. 30 continuing resolution expires and predicted a government shutdown in January; Congress has passed no appropriations since reopening after a 43-day shutdown that began Oct. 1. The piece notes Democrats could use the dispute over expiring Affordable Care Act subsidies — with monthly payments now projected to rise sharply for millions — as leverage in negotiations, heightening policy uncertainty that could weigh on near-term economic activity and risk sentiment.

Analysis

Market structure: A January shutdown raises short-term winners (long-duration Treasuries/Treasury futures, utilities XLU, defensive pharma PFE/MRK) and losers (small/mid-cap government contractors, retail names with high exposure to federal paychecks, travel/leisure in D.C.). Expect a 10–30% lift in realized equity volatility around the CR deadline and a 20–50 bps drop in 2–10y yields in a classic risk-off—benefiting TLT and municipal bonds. Supply-side: regulatory/permit delays (EPA, BLM, FAA, FDA) will slow energy and biotech project cadence, tightening near-term project flows but not long-run capacities.

Risk assessment: Tail risks include a prolonged shutdown >30 days that meaningfully trims Q1 GDP (historical range 0.1–0.3 percentage points) and could delay Treasury-backed payments to contractors, creating cashflow stress for highly leveraged gov-con names. Immediate (days): volatility and liquidity squeezes; short-term (weeks/months): earnings revisions for retail, contractors, and regional banks; long-term (quarters/years): potential legislative fights over ACA subsidies that reprice health insurers. Hidden dependencies: FDA review backlogs can delay biotech catalysts by 2–6 months; permit delays can push upstream energy capex timelines beyond one quarter. Catalysts: Jan 30 CR deadline, Senate healthcare bargaining, and White House signals/tweets.

Trade implications: Hedge now—buy 2–3% TLT (or equivalent Treasury futures) as a short-term hedge and establish 1–2% long in XLU for yield cushion; implement a Jan/Feb VIX call spread (buy Feb 2026 18/30 call spread, size 0.5–1% notional) to cap cost while capturing volatility spikes. Short 1–2% positions in SAIC (SAIC) and CACI (CACI) and consider a 1% short of the iShares US Regional Banks ETF (IAT) vs 1% long of XLF to express relative weakness in regionals. Reduce discretionary exposure: trim XLY ETF by 3% and rotate into healthcare staples (PFE, MRK) over the next 2–6 weeks.

Contrarian angles: The market may overprice systemic damage—historical shutdowns were disruptive but short-lived; if talks resume by mid-February, cyclicals can rebound sharply—prepare buy-the-dip thresholds. Mispricings: well-capitalized large defense primes (LMT, RTX) often outperform post-shutdown because backlog is funded; consider tactical 1–2% buy on pullbacks >8% from pre-shutdown levels. Unintended consequence: aggressive safe-haven inflows could steepen credit spreads and create a 3–6% buying opportunity in high-quality corporates once clarity returns; plan re-entry signals on VIX <15 and 10y yield reversion within 10–20 bps of pre-shutdown levels.

Key Decisions for Investors

• Establish a 2–3% long position in TLT (or equivalent 10y+ Treasury futures) within 48 hours as a hedge against a Jan 30 shutdown risk; trim if 10y yield rises >20 bps from current levels.
• Buy a Feb 2026 VIX call spread (example: buy 18 / sell 30) sized to 0.5–1% portfolio risk to capture a 10–30% expected volatility surge around the CR deadline; exit or roll if VIX <15 for three consecutive sessions.
• Short 1–2% positions in SAIC (SAIC) and CACI (CACI) to express near-term cashflow risk to small/mid-cap government contractors; cover if either stock rallies >12% or Congress passes a clean CR before Feb 7.
• Trim cyclical exposure by reducing XLY ETF weighting by 3% and rotate proceeds into XLU (1.5%) and a basket of PFE/MRK (total 1.5%) over 1–4 weeks to lower beta into the funding deadline.
• Add a tactical 1–2% long in RTX or LMT on any >8% pullback from pre-shutdown levels; these names are contrarian buys due to funded backlog and historically resilient post-shutdown performance.