The Week Ahead: Will Washington Gridlock Scuttle Stocks?

by Jeff Miller, A Dash of Insight

The weeks of uncertainty continue, as we ask whether political gridlock threatens the economy and the markets.

Last week I predicted a week of focus on the Fed, including more clarity on the change in leadership and a new direction for policy. It was a pretty easy call (for a change) and those stories dominated both the news and the markets.

Click on graphic for larger original image at NPR.

Despite a busy economic calendar this week will focus on Washington and the inability to compromise on important decisions. There are two key questions:

1. Can a government shutdown be avoided?
2. Will the U.S. default on its debt, by failing to raise the debt ceiling?

Background

Here is a summary of the complex situation.

• Congress has not passed an actual budget for four years. Spending authority comes via “continuing resolutions (CR)” which extend current authority.
• If there is no CR before 10/1, the authority for Federal spending will end, causing a government “shutdown.”
• In a shutdown, essential workers are still required to report for duty. Their pay will be delayed. Other government offices will close down, with rather substantial costs for stopping and starting up again. See the Clinton/Gingrich era shutdown, which has many parallels to the current situation.
• The US has a rather strange policy of setting a debt ceiling, even though the obligated spending has created a deficit for many years. Historically the Congress has authorized payments of previously authorize obligations. Whichever party does not have the Presidency often objects, with symbolic votes against the debt ceiling increase. For example, when President Obama was a Senator, he cast such a vote in opposition to raising the debt ceiling, knowing that it would not be decisive.
• In recent years, the conservative wing of the GOP has been willing to engage in brinksmanship to achieve their policy objectives. (See Don Marron on the risks).
• The current objective is withholding funds for ObamaCare.

Current Situation

The two themes – the CR and the debt ceiling — have become linked. Originally Speaker Boehner wanted to avoid a potential shutdown, preferring to use the debt ceiling as leverage. Under pressure from the Tea Party wing of the party, the House passed a CR that eliminated funding for ObamaCare. They expect Senate colleagues to use the filibuster and procedural objections to support the House decision.

GOP Senate choices are not that effective. Sen. Cruz is willing to lead the objectors, but to do so he must oppose the House version of the bill! Otherwise the procedural rules permit Majority Leader Reid to strip out the ObamaCare provisions and get a simple majority vote.  Some GOP Senators do not see the logic in opposing something they actually support.

Astute observer Stan Collender thinks that a shutdown is now unavoidable, and will probably last a week. The Collender blog attracts a savvy crowd, so read the comments to his post. He writes as follows:

“My reading of the tea leaves is that there are only two ways to avoid a shutdown at this point: If everyone in Washington stops being fierce partisans and starts acting rationally, or if one side totally capitulates to the other.

Because the first is so unlikely that it borders being absurd and the second is so unlikely that it approaches being ridiculous, it’s time to stop talking about if and start talking about what happens when a shutdown will occur.”

What will this mean for stocks? I have some thoughts which I’ll report in the conclusion. First, let us do our regular update of last week’s news and data.

Background on “Weighing the Week Ahead”

There are many good lists of upcoming events. One source I regularly follow is the weekly calendar from Investing.com. For best results you need to select the date range from the calendar displayed on the site. You will be rewarded with a comprehensive list of data and events from all over the world. It takes a little practice, but it is worth it.

In contrast, I highlight a smaller group of events. My theme is an expert guess about what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios. Each week I consider the upcoming calendar and the current market, predicting the main theme we should expect. This step is an important part of my trading preparation and planning. It takes more hours than you can imagine.

My record is pretty good. If you review the list of titles it looks like a history of market concerns. Wrong! The thing to note is that I highlighted each topic the week before it grabbed the attention. I find it useful to reflect on the key theme for the week ahead, and I hope you will as well.

This is unlike my other articles at “A Dash” where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.

Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!

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