What government shutdown? Wall Street shrugs off D.C. turmoil – for now. (+video)
Stocks were up across the board Tuesday, buoyed by positive news about US manufacturing and apparently unswayed by the government shutdown. But Wall Street could change its tune if the debt ceiling is not raised.
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“When you peel back the layers, you have consumer prices that have risen, you have a GDP that’s been better than expected, you have unemployment rates starting to taper off, so you have a lot of positive factors in the market, which is why probably you don’t see the kind of immediate downturn we may have expected today,” says Charlie Massimo, CEO and founder of CJM Wealth Management in New York.Skip to next paragraph
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Looming, however, is the uncertainty about whether it will be a long government shutdown, as well as the possibility of a government default, if Congress cannot agree on terms to raise the debt ceiling.
“The actual markets are going to care much more about the debt ceiling,” says Jerry Webman, chief economist for OppenheimerFunds in New York. “And not so much about the debt ceiling itself, but about the government actually paying its bills.”
“We’re much more worried about the government paying interest on treasuries, which it probably would prioritize payment to anyway,” Mr. Webman continues. “Government not being able to pay its bills is a lot more troubling than a government that can’t figure out what it wants to spend money on in the future.”
Still, markets seem to be heeding an old quote probably misattributed to Winston Churchill, that Americans will always do the right thing after they’ve exhausted all the other alternatives.
“I’d like to think despite what we’re seeing in Washington right now, that cooler heads will prevail and people will realize that not dealing with this and allowing this uncertainty to remain about the future course of the economy – all of this will have an impact,” Professor Shapiro says.
But a default on US treasuries would be catastrophic, most Wall Street experts say. So the market will be watching closely as a Congress in disarray will have until Oct. 17 to raise the debt ceiling.
“If not, the U.S. will default for the first time in its history and the world's financial markets would be in turmoil as U.S. Treasurys are the world's benchmark for a risk-free (default free) asset,” e-mails David Kass, professor of finance at the Robert H. Smith School of Business at the University of Maryland in College Park. “Wall Street and investors do not like increased uncertainty.”
So even though the market did not react negatively to the government shutdown Tuesday, the next few weeks could bring the kind of uncertainty that leads to a volatile landscape, in both the markets and the economy at large.
“The increasing polarization of Congress decreases the likelihood of reaching compromises and legislating solutions to the country's major problems,” e-mails Professor Kass. “The subsequent loss of confidence by the American people in the ability of Congress to function properly will discourage not only long term investment by business, but also the purchase of consumer durables."
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