Most of the focus during the week was on the debate in Washington over the budget and debt ceiling with both political parties sniping at each other saying that it will be the other’s fault if the government has to shut down with no budget in place. Obviously, stock markets don’t like these comical displays when they relate to a serious fiscal issue.
There is not a whole lot of leadership in Congress with respect to getting to a resolution ahead of time. However, even more notable, there is no leadership from the president on this issue. Stating that he is not willing to negotiate with respect to the federal budget and the debt ceiling is an extreme position. In the past there has always been give-and-take on these issues. The Acts that that pertain to the debt ceiling and federal budget make it clear that that they are legislative issues to be debated. Declaring that they will not be debated is a sure way to hamper resolution.
One reason for this may be the president’s low standing in opinion polls. A crisis would be a welcome diversion from his performance in other areas. Also, it is usually difficult for the general voting public to grasp the nuances and details of budget debates. As a result, there may be a chance to win in the eye of the public by using rhetoric instead of cooperating.
Despite all the U.S. political shenanigans, history tells us that deals are eventually made at the 11th hour. Also, once that occurs, stocks normally make up more than they lost in the weeks leading up to the deadline. As a result, even though the news sounds bad, it may not be a bad time for the markets (assuming some other event doesn’t come out of left field, like weak corporate earnings for example).
Next Friday October 4th, the U.S. Bureau of Labor Statistics employment report comes out. The Fed is likely going to keep policy unchanged until at least December regardless. As a result, if the employment report is well outside of the consensus either way, the market response might be muted.
October, sometimes a stormy month for markets, looks like it might be a relatively benign stretch despite the storminess of the politics.
Mark Jasayko
