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The market's message to Washington: Stop screwing around

Rick Newman
Senior Columnist

A booming stock market masks a lot of stupidity. A falling market highlights it.

When stocks were on an unstoppable march upward, politicians could get away with idiotic threats to shut down the government, send immigrants packing and disrupt the economy in other ways. But with markets suddenly nervous, and the S&P 5000 index down about 8% from its January highs, missteps in Washington could have an outsized effect on Americans’ investment portfolios.

President Trump and his fellow Republicans enjoyed a big legislative win last year when Trump signed a sweeping set of tax cuts, mostly for businesses. Their job in 2018 is basically do no harm, and if the tax cuts are going to stimulate the economy as Republicans claim, let the medicine do its work.

But that’s not what has been happening. An impasse on spending and immigration legislation caused a brief government shutdown in January, and could do so again any day now, as a temporary spending measure expires and Congress needs to agree on a new one. Republicans and Democrats are squaring off in the same cul-de-sac they did last time, with no new paths to compromise apparent.

In March, Congress will have to decide whether to raise the government’s borrowing limit, so spending can continue at normal deficit-financed levels. There’s really no choice other than extending the debt ceiling, yet this regular exercise provides an opportunity for Rs and Ds to fight over their usual differences, with each side gauging who has the most to win politically (or the least to lose) by threatening a catastrophic default on U.S. debt.

Usually they do this with high confidence the markets will shrug off any damage done by down-to-the-wire brinkmanship. But markets may not be so tolerant all of a sudden. “There are a number of policy issues that can add further strain at a time of volatile markets,” researchers from Strategas Group wrote in a recent note to clients.

Policy weighing on markets

Strategas highlights several policy issues in Washington that could trip up markets, including the debt-ceiling deadline, Robert Mueller’s investigation into Russian meddling in U.S. elections, tariffs Trump has threatened to slap on imports, and the risk Trump will overturn the North American Free-Trade Agreement. On three of those issues, politicians could choose to keep the status quo in place, more or less, eliminating the threat of policy disruption.

The Mueller investigation is a different story, since Mueller will act on his own, probably releasing his findings sometime in 2018. But politicians aren’t helping with their competing memos alleging conspiracies of different sorts, when there probably are no such conspiracies. Markets haven’t cared up till now, but they will if the government begins to seem unstable—especially if Trump seeks to fire Mueller or Mueller’s bosses at the Justice Department.

There’s also the chance policy decisions that have already been made will weigh on markets. The GOP tax cuts initially seemed like a boon for stocks, since they were sure to boost after-tax income for companies, which ought to push stock prices up. But markets have now turned that story around, voicing fresh worry about the inflationary effects of flushing new money into an already strong economy, and the rising interest rates that could follow. The Treasury Department is also issuing a lot of new debt to cover the government revenue lost to tax cuts, another force that seems to be pushing bond prices down, interest rates up, and investor worries into the sell zone.

Congress is contemplating a big boost in spending to match the tax cuts, which it might want to reconsider, given recent turmoil in the markets. “A number of clients have remarked that if this [spending] package comes to fruition, the additional fiscal spending would be too much fiscal policy stimulus in this environment,” Strategas analysts wrote.

Washington listens to Wall Street when the stakes get high enough. Back in the fall of 2008, amid a terrifying market crash, Congress initially voted against the big bailout package that came to be known as TARP. Stocks plunged further, and Congress voted again, this time approving the bailout bill.

The current selloff is a wobble, not a crash–so it could take a while for politicians in Washington to get the message. But they have less room to mess with the economy than they did just a few weeks ago. That could be a happy side effect of an unnerving downturn.

Confidential tip line: rickjnewman@yahoo.com. Encrypted communication available.

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

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