By Rodrigo Campos
NEW YORK, Sept 20 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
"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
This autumn's standoff comes with two separate but related
First, failure to come up with a budget deal by the end of
the month risks a federal government shutdown starting Oct. 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
"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
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,
"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
, 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 will open Monday with three new
components as Goldman Sachs, Visa and Nike
replace Bank of America, Hewlett-Packard and
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
"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 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
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 Oct. 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.