By Angela Moon
NEW YORK, Sept 29 With a possible U.S.
government shutdown days away, Wall Street still has not come
down with a critical case of fiscal fever despite forecasts that
failure to resolve the federal budget standoff could be
The benchmark S&P 500 is up more than 3 percent for
September, which has traditionally been described as the worst
month for stocks and was just 2 percent off its all-time high.
"Part of the calmness comes from the fact that investors
have seen this before," said Ryan Detrick, senior technical
strategist at Schaeffer's Investment Research in Cincinnati,
The market expects agreements will be reached, even if they
come down to the wire, he said.
Time was running short for lawmakers to avert a partial
shutdown of the government beginning Tuesday when the new fiscal
year begins. Congress was struggling to pass an emergency
funding bill, but Tea Party-backed Republicans in the House
sought to use the must-do bill to gut the new healthcare
overhaul known as Obamacare or enact other Tea Party policies.
The Democrat-majority Senate passed a funding bill without
attachments on Friday, but the situation remained fluid. The
Republican-controlled House was expected to vote on a bill
during the weekend. President Barack Obama called on the House
on Friday to stop "political grandstanding" and pass the
If the government does shut down non-essential operations on
Tuesday, the Labor Department said it will not issue its monthly
employment report scheduled for next Friday.
An extended government shutdown, or even worse, a debt
default, could harm the market's reputation by rekindling
memories of 2011 when similar political infighting prompted the
loss of the United States' triple-A credit rating and was the
primary driver of the stock market's last full-on correction.
For last week, the S&P 500 declined 1.1 percent, the Dow was
down 1.3 percent and the Nasdaq was up 0.2 percent. It was the
first weekly drop in four for the S&P 500 and Dow.
In a second explosive Washington cliffhanger, Congress must
agree to increase the $16.7 trillion limit on federal borrowing,
which the administration says will be reached by Oct. 17. If
Capitol Hill fails to act in time, the unthinkable could happen
and the United States could default on its debts.
But even in the options market, which is often seen as the
place to offset risk and make protective bets against a decline
in the stock market, there is little or no volatility premium
priced in for the debt ceiling debate.
A growing number of market participants are even viewing the
battle in Washington as an opportunity to jump into equities.
"Every situation we've had like this over the past few years
has been a buying opportunity. This is just another wrinkle, not
a time to change your strategy," said Andres Garcia-Amaya,
global market strategist at J.P. Morgan Funds in New York with
$400 billion in assets under management.
During the federal government shutdown from Dec. 15, 1995,
to Jan. 6, 1996, the S&P 500 added 0.1 percent. During the Nov.
13 to Nov. 19, 1995, shutdown, the benchmark index actually rose
1.3 percent, according to data by Jason Goepfert, president of
OPTIONS SUGGEST LITTLE RISK
While the cost of insuring against a U.S. default on Friday
crept higher, the price of put options on the S&P 500, the most
popular hedging strategy against a decline on the benchmark
index, is near its lowest level since the financial crisis.
"We looked at options prices for the S&P 500 as well as
stocks with the highest revenue exposure to government, finding
that relatively little fear is priced in," said Goldman Sachs in
a note to clients on Thursday.
"Complacency is even more pronounced on stocks with high
government exposure. Fear priced into options on these stocks
dropped over the past few months to new lows versus the S&P
With just one trading day to go before the end of the third
quarter, the stock market could see heightened volatility on
Monday as money managers adjust their positions to improve the
look of their portfolios, or "window-dressing."
If a government shutdown is avoided, Wall Street will focus
this week on the critical September jobs report, expected on
Friday. After the Federal Reserve decided to keep its stimulus
efforts intact, investors will scrutinize the report for a
better sense of when the central bank may begin to reduce the
size of its bond-buying stimulus program.
"The jobs situation is still the biggest driver for the
market, and the Fed needs to see better data to pull the
trigger," said Garcia-Amaya.
Other data this week include Chicago PMI and the Dallas Fed
Manufacturing Survey, due on Monday. The Institute for Supply
Management manufacturing and construction spending reports are
due on Tuesday, followed by the ADP private-sector employment
report on Wednesday. Weekly jobless benefits claims data will be
released on Thursday.