U.S. stocks needn't fret about a government shutdown

NEW YORK Fri Sep 20, 2013 6:37pm EDT

Traders work on the floor of the New York Stock Exchange shortly after the opening of the market in New York September 20, 2013. REUTERS/Lucas Jackson

Traders work on the floor of the New York Stock Exchange shortly after the opening of the market in New York September 20, 2013.

Credit: Reuters/Lucas Jackson

NEW YORK (Reuters) - Investors may be tempted to shy away from stocks in the next week or two as the latest version of the fiscal follies plays out in Washington.

It's understandable. The prospect of a government shutdown or, worse, default on the federal debt, rekindles memories of 2011 when Washington's infighting prompted the loss of the United States' triple-A credit rating and was a primary driver behind the stock market's last full-on correction.

The sense from Wall Street analysts this time, however, is that the current drama is likely to feature more bluster than bravado and contains overblown threats.

"Looking back at the pattern that has emerged since the debt ceiling fiasco back in 2011, the Republican leadership got the message that if there is a government shutdown, most likely their party is going to get blamed," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

"They're going to be very sensitive to that public sentiment as we get closer to a midterm election year" in 2014, Jacobsen said.

"In spite of all the brinkmanship being talked about ... there will be a deal and then we will move on," said Stephen Massocca, managing director at Wedbush Equity Management in San Francisco.

This autumn's standoff comes with two separate but related deadlines.

First, failure to come up with a budget deal by the end of the month risks a federal government shutdown starting October 1. Then, by mid-October lawmakers must vote to raise the federal debt ceiling to prevent a default.

The posturing has been under way for weeks. In the latest move, the Republican-controlled House of Representatives passed legislation on Friday to fund federal agencies through mid-December but also inserted a provision killing President Barack Obama's landmark healthcare overhaul.

Democrats, who control the Senate, have said they will strip out that provision when the bill comes before the Senate, most likely next week.

Wall Street players are sanguine about events unfolding in Washington.

EMPTY THREAT

"Uncertainty will probably rise ahead of these events, but we think this is likely to be short-lived and probably less severe than some other recent episodes," said a Goldman Sachs research note.

In fact, the current episode could prove to be an empty threat, like the so-called "fiscal cliff," last December. After weeks of dire predictions of big tax hikes and draconian spending cuts if no deal was reached, lawmakers came to a last-minute accord, and the market kicked into high gear for 2013. The S&P 500 is up more than 22 percent year to date on a total return basis, including re-invested dividends.

"While we could get a pullback on worries about the debt ceiling and the continuing resolution, my guess is it will go the same way as the fiscal cliff went - a bunch of sound and fury signifying nothing," said Jeffrey Saut, chief investment strategist at Raymond James Financial in St. Petersburg, Florida.

"If the market pulls back on (Washington) worries, I think it's a buy," said Saut.

As the budget battle heats up, the lack of angst among investors was reflected in a fall in the CBOE Volatility Index .VIX, Wall Street's favorite measure of fear. It ticked down to 13.12 on Friday and has posted three straight weeks of losses for a total drop in that period of 23 percent.

Next week on Wall Street, the widely followed Dow Jones industrial average .DJI will open Monday with three new components as Goldman Sachs (GS.N), Visa (V.N) and Nike (NKE.N) replace Bank of America (BAC.N), Hewlett-Packard (HPQ.N) and Alcoa (AA.N).

ANOTHER TAPER TANTRUM

Even though the market has a low chance of disruption from the fiscal fighting, there might still be a bearish signal from Washington.

"Fiscal retrenchment" in Washington was one of the reasons cited this week by the Federal Reserve for not reducing its stimulus program of $85 billion a month in bond purchases. The policy has kept downward pressure on interest rates and has helped lift the S&P 500 .SPX this year.

The reduced likelihood of a political impasse over the budget could then open the door for the Fed to begin tapering as early as late October when it holds its next policy-setting meeting.

That possibility was raised by St. Louis Fed President James Bullard on Friday, noting that the decision still depends on data about the economy. He also said the Fed has maneuvering room as along as inflation is low.

"One of the things that pushed the Fed into the precautionary side was the fiscal issues. They realized what sort of effect that could have on the economy and decided not to taper," said Wells Fargo's Jacobsen.

"It is entirely possible that on October 30 we could see a slight tapering because we'll have passed some of the chaos in (Washington) D.C. if there is a resolution of the budget issues," he said.

(Changes wording to "last" from "most recent" in second paragraph)

(Reporting by Rodrigo Campos, additional reporting by Chuck Mikolajczak; Edited by Dan Burns)

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Comments (5)
AZreb wrote:
Heck, no – the big corporations on the board have, for the most part, outsourced their labor and built factories in other countries so a government shutdown won’t affect them hardly at all. As long as they get their tax breaks, all is well for the big corporations.

Sep 21, 2013 9:27am EDT  --  Report as abuse
Harry079 wrote:
What happened to this law?

No Budget NoPay Act of 2013:

The law requires the appropriate payroll administrator of each house of Congress to deposit in an escrow account all mandatory payments for compensation of Members of Congress serving in that house if by April 15, 2013, that house has not agreed to a concurrent budget resolution for FY2014. It then requires release to those Members of such payments after April 16, 2013, only upon the earlier of: (1) the day on which that house agrees to a concurrent budget resolution for FY2014, or (2) the last day of the 113th Congress.

All I keep hearing is about a Continuing Resolution which is NOT a budget.

Sep 21, 2013 1:19pm EDT  --  Report as abuse
chekovmerlin wrote:
The 1% or even the 10% never have to worry. They didn’t in the 1930s and they didn’t in ’07-09. No worry now. There money is safe overseas, the Banks don’t care and the people live in guarded retreats with private cops. No need to worry. The rich never do. Pathetic story about the plutocrats and their attitude.

Sep 21, 2013 11:36pm EDT  --  Report as abuse
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