What government shutdown? Wall Street shrugs off D.C. turmoil – for now.

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.

Richard Drew/AP/File
Specialist Christopher Culhane works at his post on the floor of the New York Stock Exchange, Sept. 18.

Despite earlier worries, it appears Wall Street and markets around the globe have already brushed off Tuesday’s government shutdown and returned to business as usual – even though a more volatile threat looms as the US government heads toward a debt ceiling fight.

Burnished by positive news about American manufacturing, stocks were up across the board Tuesday, with the Dow climbing 0.41 percent to 15191 and the S&P 500 up 0.8 percent at closing. Nasdaq, too, finished the day up 1.23 percent, erasing its losses from the end of last week, when fears of a government shutdown made the markets stumble.

The strong market showing comes even as the Affordable Care Act begins the long-awaited launch of its signature health insurance exchanges. House Republicans are refusing to fund government operations unless the White House agrees to negotiate a rollback of the law’s provisions – something the Democrat-controlled Senate and President Obama have long said they would never do.

By now, the market isn’t surprised by Congress’s surly behavior.

“I think the bulk of the market reaction to the shutdown has basically taken place,” says Steven Shapiro, director of the Center for Risk Management at the New York Institute of Technology. “As it became more likely that the shutdown would occur, I think the market started processing that information, and that’s when you started to see a negative trend – say, mid to late last week into yesterday.”

Indeed, what markets loathe most are the vicissitudes of uncertainty and instability. Even predictable downturns can reap a profit for smart investors, experts say.

Historically, the S&P 500 Index dropped an average of 0.3 percent during shutdowns, but recovered 0.9 percent in the 10 days following it, according to analysis by Ned Davis Research.

The federal government has shut its doors 17 times previously in the past 40 years, the most recent coming in 1995 to 1996, when Republicans forced a shutdown over two periods totaling 26 days.

But Wall Street woke up Tuesday morning to see a global shrug to the 18th US government shutdown. Markets in Germany and France closed over 1 percent higher, and London slipped just a fraction. The dollar fell, however, dropping 0.4 percent against foreign currencies and slipping to its lowest level against the euro in seven months.

But investors seemed just as interested in the best showing for US manufacturing so far this year: Some 56.2 percent of purchasing managers reported an improvement in their businesses in September, up from 55.7 percent in August, according to the PMI index released Tuesday by the Institute for Supply Management.

“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.

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."

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.