NEW YORK (Reuters) - U.S. fund managers are continuing their retreat from consumer-related stocks and increasing their defensive bets out of concerns that the U.S. economy is slowing even though government leaders had reached agreement to end the longest shutdown ever.

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While the S&P 500 index is up more than 5 percent since the start of January, money managers including Federated Investors, Baron Funds and Hodges Capital Management are bracing for a powerful knock-on effect on the consumer. The shutdown left roughly 800,000 federal workers without pay for 35 days, and U.S. consumer confidence fell in December by its largest amount in three years.

President Donald Trump said on Friday afternoon that he had reached a deal with Congress to end the partial shutdown and restore government funding for three weeks while talks continue on funding a wall on the U.S.-Mexico border, one of Trump’s signature campaign promises.

Trump said that the government may shut down again on Feb. 15 or he will declare a national emergency if Congress does not appropriate money for a border wall.

“The market right now is treating this like a hurricane, where you know there will be an economic impact but you tend to discount any hit to the data because you know there will be some catch up,” said Steve Chiavarone, a portfolio manager at Federated Investors. “But here’s what’s dangerous about that approach: the sample size is zero for shutdowns this long.”

As a result, Chiavarone said he is becoming more cautious on consumer stocks. He noted that these probably saw revenue declines as government employees cut back and as that affected spending by owners or employees of restaurants, hotels, and retailers that depend on their business.

Shawn Kravetz, Esplanade Capital LLC’s chief investment officer, said he expected consumer stocks like Walmart Inc and dollar-store chains like Dollar Tree Inc to benefit as furloughed workers “trade down” into more value-oriented chains, leaving higher-end department stores and travel companies ripe for a slowdown.

“There’s no question that life is about cash flow. Even if you are highly confident that you will eventually get paid, people will pull in their horns and hunker down,” he said.

PAST SHUTDOWNS

The benchmark S&P 500 has been little changed during past government shutdowns, said Sam Stovall, chief investment strategist of U.S. equity strategy at New York-based CFRA.

Each of the more than 20 government shutdowns since the 1970s has lasted a week on average and left the S&P 500 essentially flat, he said. The longest, a 21-day shutdown from December 1995 to January 1996, saw the S&P 500 rise 0.1 percent during the shutdown itself and gain 4 percent in the month after it finished.

Michael Lippert, a portfolio manager at Baron Funds, said the shutdown is not likely to leave a lasting impact on portfolio holdings such as Amazon.com Inc that are still grabbing market share. Still, it could curtail investor enthusiasm for initial public offerings, he said.

“Sentiment affects stock prices in the short term and my bigger worry is what dysfunction in D.C. will do to market confidence,” he said. “Could we see a pullback on the magnitude of what we saw in December? It’s certainly possible.”

Eric Marshall, a portfolio manager at Dallas-based Hodges Capital Management, said the firm is underweight restaurant stocks in part because of the government shutdown and concerns about slowing economic growth.

Marshall expects to see more companies lowering guidance as they report earnings over the coming weeks. S&P 500 earnings are now expected to grow by 5.9 percent in 2019, compared to October estimates that earnings would grow by 10.2 percent, according to data from Refinitiv.

“You’re going to start seeing over the next couple of weeks whether companies factor the shutdown into their guidance, and whether it’s going to start to have some negative momentum in the economy,” he said.