Last Monday, as Congress was debating the 97th version of the Continuing Resolution (CR), I decided to watch some of the floor remarks made from Capitol Hill. After about four minutes of viewing, the alarmist nature of the comments about the pending shutdown proved to be three minutes too much for me.
For sweet irony, I remembered that the whole reason we are having this discussion is that the government has been operating on stopgap spending measures (CRs) because they could not make it through the normal budgeting/appropriations process. The Democrats did their part by refusing to pass a budget out of the Senate for four years. Once the Senate did finally pass a budget earlier this year, the Republicans then refused to form a budget conference to work out the differences between the House and Senate budgets.
To ensure that this was a complete bipartisan mess, President Barack Obama submitted his budget earlier this year in April – two months later than the first week of February required by law. This process ideally would have set the framework for producing appropriations bills for various government agencies. Instead, CRs are required to keep the government running. When Washington is operating normally, government funding decisions are debated and hashed out in the normal appropriations process. When it is not, what you see now is what you get. This is Washington in a nutshell: both parties howling at the ramifications of their own previous actions.
Not to be outdone, following the Capitol Hill comments, I turned on CNBC, which had begun its government shutdown countdown clock, revealing the hours/minutes/seconds remaining, as the pundits clamored about the dire consequences that awaited the financial markets. By the time I went to bed, based on what I had heard and seen throughout the day, I was expecting to wake up on Tuesday and find a country that did not even exist, with the stock market down by at least 20 percent. Lo and behold, I woke up and life went on. On Friday, the federal government completed its fourth shutdown day, and the S&P 500 finished 0.5 percent higher than its closing level from Monday, the last time the government was open.
Next up is the debt ceiling. I saw a recent CNN headline that said, “Debt ceiling: Countdown to default.” Cue up a new countdown clock! While a government shutdown has been a market yawner, a government default would definitely translate into a market roar. However, the debt ceiling has been raised 53 times since 1978. Within calendar year 1990 alone, the debt ceiling was raised seven times.
Do we expect the United States this year to default on its debt for the first time in its history? No, although we never completely rule it out. Do we expect the debt ceiling to be raised for the 54th time? Yes. Do we expect fiscal negotiations around this debt ceiling? Yes. In fact, there have been multiple debt limit increases throughout history that have had policy negotiations surrounding them (sequester for one). There are even whispers now about another attempted grand bargain (tax reform, entitlement reform, etc.) associated with this debt ceiling increase.
As a result, market volatility could continue over the next few weeks. In the meantime, take a deep breath!
Sources: The Hill, CBS News, Yahoo Finance, Bloomberg, CNN, JP Morgan, Wall Street Journal, Politico
Mark Sorgenfrei Jr. is vice president and investment analyst for Waddell & Associates Inc.