The standstill in Washington and a showdown on the debt ceiling are weighing available on the market
Senate Majority Leader Chuck Schumer (D-NY) speaks with House Speaker Nancy Pelosi (D-CA) on the steps of the US Capitol.
Drew Angerer | Getty Images
The US stock market is well on its way to having its worst day in months. And US politics is partly responsible.
With the Dow Jones Industrial Average down 870 points in afternoon trading – on its way to its worst day since October – and the S&P 500 shedding more than 2%, strategists say the deadlock will begin on Capitol Hill To slow down the market.
The S&P 500 is on track for its own worst session since January.
Dan Clinton, head of policy research at Strategas Research Partners, wrote Monday that Wall Street is increasingly convinced that lawmakers will not tackle the debt ceiling anytime soon.
“Much of this is short-term risk and headline risk, but the Washington policy framework is shifting to more risk after 18 months of unlimited fiscal and monetary policy,” he wrote. “The consensus now expects the debt ceiling to be raised in the second half of October, which is a last-minute move, and to talk about debt ceiling overruns and government spending prioritization for another month if the debt ceiling is not raised.”
If Congress fails to suspend or increase the credit limit before the so-called drop-dead date, the US government will be insolvent for the first time. The Treasury Department does not currently have an exact “drop-dead” date, but estimates it will likely be sometime in October.
House Democrats plan to vote this week on a bill that suspends the cap and funds the government for a few months beyond the end of the fiscal year, which ends September 30th.
Republicans have said they will not help the Democrats lift the credit limit as a kind of protest against the trillions of dollars in new spending proposed by the Biden administration.
“This week, the House of Representatives will pass a bill to fund government through December this year to avoid unnecessary government shutdowns that harm American families and our economic recovery before the 30th deadline,” said Monday’s press release.
“Legislation to avoid a government shutdown will also include a suspension of the debt ceiling until December 2022 in order to once again meet our commitments and protect the full confidence and creditworthiness of the United States,” she added. “The American people expect our Republican colleagues to live up to their responsibilities and pay off the debt they proudly took on with the December 2020 COVID package ‘908’ that helped American families and small businesses get out of the COVID -Crisis to stumble.
Probably the bigger hurdle is the Senate, where lawmakers must cast 60 votes to pass such a law that is not bound by the separate Atonement Act.
Raising or suspending the debt ceiling does not entitle you to additional budget expenditure. Instead, raising the cap is more like increasing the country’s credit card limit.
Importantly, even if the Biden government hadn’t approved spending – even if Congress hadn’t passed bills in 2021 – lawmakers would have to raise the cap to pay for the laws passed in previous years.
“The US has never defaulted. Not once. This would likely spark a historic financial crisis that would worsen the damage of the ongoing health emergency,” Treasury Secretary Janet Yellen wrote in a comment over the weekend.
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“Default could trigger a surge in interest rates, a sharp fall in stock prices and other financial turmoil,” she added. “Our current economic recovery would turn into recession, with billions of dollars in growth and millions of jobs.”
Even if lawmakers were to ultimately avoid a technical default, a protracted last-minute battle over the debt ceiling could lead to another downgrade in the US debt rating, similar to what happened in 2011. The mere specter of default prompted Standard & Poor to downgrade US Treasury Loans, which in turn slowed government bond demand and increased yields.
However, investor fears are not limited solely to the credit limit.
Instead, the additional fear of the debt ceiling is compounding growing fears of the delta variant of Covid-19, annoying inflation and the end of the loose policy of the US Federal Reserve, according to Art Hogan, chief market strategist at National Securities.
Hogan stated that the markets are keeping a close eye on bipartisan efforts to exceed $ 1 trillion in infrastructure spending and the Democrats’ efforts to add an additional $ 3.5 trillion to revolutionize the country’s social safety net keep.
But, he said, it’s not exactly surprising that the $ 3.5 trillion bill is slashed on its way through Congress.
“It feels like we have consensus that we will get some, but not all, spending proposals passed,” Hogan wrote in an email. It is likely that we will see some “tax increases, but certainly not of the magnitude that is currently being discussed”.
September is often a choppy month for markets, Hogan added, and 2021 is no exception.
“When we think about things that are driving markets, it certainly feels like we’ve gone from being complacency to being concerned about a host of potential headwinds,” he wrote. “None of the concerns that market participants have in the here and now are necessarily new, but rather viewed through the lens of a historically difficult month for markets in general. As such, they appear to be peaking.”
The Dow and S&P 500 each lost more than 4% in September.