The third political showdown over U.S. government finances in little more than two years eroded consumer confidence, drew a warning from President Barack Obama about the threat to the economy, and dented the government’s global reputation.
Wall Street was undeterred.
The Standard & Poor’s 500 stock index rose to a record 1,733.15 at 4 p.m. yesterday in New York, up from 1,681.55 on Sept. 30, the day before a budget impasse shut the government. The 2.6 percent yield on the 10-year Treasury note and the dollar’s value are little changed from the start of the dispute.
While Washington has never been more deeply enmeshed in regulating financial markets than in the five years since the government rescued Wall Street from a meltdown, investors are increasingly taking in stride the capital’s chaotic politics.
“What this did more than anything is reinforce the idea that we do not need to get so exercised about the government,” Jim Paulsen, chief investment strategist at Wells Capital Management with $340 billion in assets under management, said of the latest budget battle. “We’re giving less reaction to made-up government crises.”
The economy is still growing faster than both Europe and Japan. And investors say the stalemate between Obama and congressional Republicans, though frustrating, isn’t fatal.
“This is not the Weimar Republic,” said George Magnus, senior economic adviser at UBS Ltd. in London. “It’s not as though the United States is insolvent.”
The politicians’ verdict after the resolution of the deadlock over funding the government and lifting the nation’s $16.7 trillion debt limit was more downbeat.
Obama said yesterday at the White House that the 16-day federal shutdown “inflicted completely unnecessary damage” on the economy and increased the government’s borrowing costs. The Treasury Department’s Oct. 16 auction of $20 billion in four-week bills drew a rate of 0.24 percent -- more than three times the average over the past year, yet still near historic lows.
The president’s irritation was echoed on Capitol Hill. “There are only so many times we can do this without the wolf really being at the door,” Senator Mark Warner, a Virginia Democrat, told Bloomberg Television. “This is not a responsible way to run the largest enterprise in the world.”
John Engler, president of the Business Roundtable, a Washington-based association of CEOs, and a former Republican governor of Michigan, bemoaned the “severe and entirely avoidable blow to America’s reputation around the world.”
The divergent views in the realms of politics and finance underscore how the two worlds struggle to understand each other, even as Washington’s involvement in the markets has grown with the 2010 passage of the 2,300-page Dodd-Frank bill, the most sweeping revamp of financial regulations since the Depression.
“Washington speaks in a different language than Wall Street, and Wall Street speaks in a different language than Washington,” said Chris Krueger, senior policy analyst at Guggenheim Securities in Washington. “You have two fundamentally different cultures.”
What seems in Washington to be a high-stakes struggle over the direction of the country strikes many investors as a repetitive exercise in self-promotion.
To be sure, some in the financial industry say a future debt crisis may prove more damaging. As the standoff deepened, Treasury securities lost ground. This month through Oct. 15, Treasuries of all maturities lost 0.33 percent, while the rest of the global government bond market gained 0.04 percent, according to Bank of America Merrill Lynch indexes.
And recent events have shaped views of the economy. Americans in October were the most pessimistic about the nation’s economic prospects in almost two years on concern over political gridlock, the latest Bloomberg Consumer Comfort Index reading showed. Economists at IHS Global Insight on Oct. 16 cut their fourth-quarter growth forecast to 1.6 percent from 2.2 percent. Stanley Black & Decker scaled down its full-year profit forecast in part because of “the impact of the U.S. government shutdown,” CEO John Lundgren told analysts.
Still, many financial executives expect the economic pain that results from budget fights to be temporary. In the second quarter, the U.S. economy expanded at a 2.5 percent rate, outpacing Japan’s 0.9 percent and the euro area’s 0.7 percent.
Borrowing costs for U.S. companies tumbled during the shutdown, with yields on corporate bonds, from investment grade to junk, falling to an average of 3.88 percent yesterday, the lowest since June and down from September’s high of 4.32 percent, according to Bank of America Merrill Lynch indexes.
The S&P 500 index (SPX) extended its record high for a second day, rising 0.3 percent to 1,737.59 at 11:03 a.m. today in New York.
After the political standoff that led to the August 2011 downgrade of the U.S. credit rating, the economy grew at a 4.3 percent annualized rate over the next two quarters. Following the 27-day shutdowns in 1995-96, growth averaged 4.9 percent in the first half of 1996.
Joseph LaVorgna, chief U.S. economist at Deutsche Bank Research, said the economic hit this time also “should not be that large.” Standard & Poor’s estimate of the shutdown’s $24 billion cost to fourth-quarter output is less than 1 percent of U.S. annual output. Economists at IHS Global Insight say the damage “will be confined to the fourth quarter.”
Some companies that were hurt by the downturn agree. Knoll Inc. (KNL:US), a maker of office furniture and textiles, said the shutdown had delayed about $10 million in government business that it expected now would arrive in early 2014.
The temporary economic stumble also makes it more likely the Federal Reserve will continue its $85 billion in monthly asset purchases, providing a continued boost to the economy and financial markets. The Fed’s planned “taper” now may not occur until 2014, Marc Chandler, global head of currency strategy at Brown Brothers Harriman, told clients in a research note.
The debt-ceiling showdown is “unlikely to cause any permanent economic or financial markets damage,” said William Demchak, CEO of PNC Financial Services Group.
That’s mainly because the U.S. has inherent advantages. Its $16.7 trillion economy is the world’s largest and its capital markets are the deepest and most liquid. The $11.9 trillion market in outstanding Treasury securities, which has more than doubled since 2008, is the biggest pool of sovereign debt.
The U.S. dollar is the global reserve currency: 62 percent of the world’s identified reserves are in dollars, with the second-place euro trailing at 24 percent, according to the International Monetary Fund.
“There is no market that has the depth and the breadth of the U.S. capital markets,” said Magnus of UBS. “So there is just nowhere else to go.”
Some investors are tiring of the political drama.
“Every time we play this game, it’s just a small chip away -- it just slightly erodes the benchmark status that Treasuries enjoy,” said Jason Evans, co-founder of hedge fund NineAlpha Capital LP in New York.
Washington’s repeated rounds of fiscal chicken are encouraging some investors to look at alternatives to the U.S. dollar, said Evans, the former head of U.S. government bond trading at Deutsche Bank AG.
The shutdown settlement that Obama signed early yesterday only funds the government through mid-January and lifts the debt ceiling until Feb. 7, meaning the countdown to the next political crisis already has begun.
Krueger of Guggenheim Securities echoed Warner’s analogy about the “boy who cried wolf,” saying a future budget fight may eventually prove dangerous.
“At some point,” he says, “the wolf could still eat the boy.”
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