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Markets to Congress: Grow Up

Sheraz Mian

Tuesday, October 1, 2013

The markets are shrugging the latest Washington budget fight even though this one has resulted in a government shutdown. Stocks were down Monday as the Congressional drama has unfolded, but the bond market didn’t show any nervousness. And stocks are indicating positively at the pre-open. Bottom line: the markets are telling Congress to grow up.

There could be a rational explanation for the market’s response. And that has to do with the market’s calculus for how the shutdown plays into the Fed’s Taper debate. Friday’s September non-farm payroll report will most likely be delayed by the shutdown, which means that the Fed’s no-Taper caution was not only justified but likely the right call.

The government shutdown may not have much of an economic impact, particularly if it remains temporary. But the debt ceiling issue is a big deal, and brinkmanship on that front will be materially destabilizing for the markets and the economy. Bottom line, the Washington fight has the potential of damaging the economy and the Fed will most likely try to counteract it through continuing with its existing programs, at least for now.

The stock market has had an amazing run thus far, despite mediocre economic and corporate earnings momentum. The Fed’s continued support was the key differentiator that kept the market on its uptrend. With the last quarter of the year getting underway today, investors will be hoping for the trend to continue as long as the Fed stays behind them. But can the Fed afford to make no changes to its policy stance in the coming months? The answer to that question isn’t that clear, at least not at this stage.

Sheraz Mian
Director of Research

Zacks Investment Research
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