It’s made-for-TV drama of the worst kind—and the stock market wants none of it.
We’re speaking, of course, of the hubbub in Washington, where Democrats and Republicans are engaged in inter- and intra-party standoffs over government funding, infrastructure investments, and the U.S.’s ability to issue debt. Those fights have produced no shortage of dire predictions, especially regarding the debt ceiling, which constrains how much the federal government can borrow to meet existing obligations. Failure to address the debt limit would result in an unprecedented U.S. sovereign debt default.
But despite the heightened political brinkmanship, cooler heads should prevail. A U.S. default is a hard-to-imagine scenario, and investors should look past any headline-driven volatility over the next few weeks. Federal Reserve tapering, potential U.S. corporate tax changes, and the paths of the pandemic and global economic recovery will determine the market’s medium- and long-term direction—not a few weeks of high-stakes but now-normal partisan deadlock. Chances are everyone will have forgotten about the whole drama a month from now.
Still, the Congressional wrangling has weighed on stocks. The
S&P 500 index
finished the week down 2.2%, at 4357.04—notching its worst September since 2011, which occurred during another debt-ceiling standoff.
Politics wasn’t the only thing hurting stocks. Pressured by an increase in bond yields—the yield on the 10-year U.S. Treasury note topped 1.54% this past week, its highest since June—the tech-heavy
Nasdaq Composite
dropped 3.2%, to 14,566.70. The
Dow Jones Industrial Average
fell 471.54 points, or 1.36%, to 34,326.46. It also broke a five-quarter winning streak, losing 1.9% from July to October.
There was plenty of movement on the Congressional front late in the week, but the saga remains far from over. The Senate and House of Representatives voted to pass a continuing resolution on Thursday to fund the federal government through Dec. 3, and President Joe Biden signed it that night. It avoids a government shutdown for at least the next couple of months. An infrastructure bill vote this past Thursday was delayed, with Democrats on either end of the party continuing talks on a separate reconciliation budget focused on “social infrastructure” and climate change provisions.
Those remain sideshows compared with the main act—the debt ceiling. On Wednesday night, in a largely party-line vote, the House passed a debt-ceiling extension, which would increase the amount of money the Treasury is allowed to borrow to pay the federal government’s bills. Passage in the Senate remains a longer battle: Democrats say they don’t want to add the increase to their in-progress reconciliation package, while Republicans say they won’t go along with a stand-alone debt-ceiling increase.
The clock is ticking. Treasury Secretary…
Read More: Stock Market Slumps as Debt Ceiling Standoff Looms. How Bad Will It