Hardening positions on the federal budget and borrowing limit, and recent political setbacks suffered by both President Barack Obama and Republican congressional leaders as they go into the fight, are raising the odds of a government shutdown, debt default or near-miss that could hammer the equities markets.
“There is a risk of the stock market selling off a thousand points over two or three days.”- Chief Financial Economist at Bank of Tokyo-Mitsubishi UFJ in New York
Forty percent of global investors surveyed in a Sept. 10 Bloomberg poll reported they would begin to exit the turbulent U.S. markets in the event of a government shutdown, which many economists say would still be regarded as less damaging than a debt default, but would still add to the risks associated with investing in the stock market.
“We are in for another ugly confrontation … Even though everyone knows the impasse will be short-lived, it is a sad reminder of how dysfunctional Washington has become. It will be a catalyst for taking profits after the recent run-up.“- Chief Investment Officer for Growth Equity at Rye, New York-based Gamco Investors Inc.
The last time President Obama and Congress were at a stalemate over the debt ceiling, back in 2011, Standard & Poor’s lowered the United States government’s credit rating. Surprisingly, bond investors at the time were not terribly upset by the news, even though yields went down briefly while the equity markets were rattled. Although the bond market did not seem overly troubled during the 2011 conflict over raising the U.S. debt limit, stock investors lost their confidence when repeated efforts to reach a broad deal collapsed, and there was no meaningful resolve to address long-term fiscal challenges.
With the United States’ economy growing at a tepid 2.5 percent annual pace in the second quarter of this year (2013) and slowing to 2 percent in the third quarter, according to the median forecast of economists surveyed by Bloomberg News, a lengthy debate over the budget is very likely to undermine the confidence of domestic and international businesses, investors and consumers. Without a doubt this will inspire confused investors to seek alternatives, to compensate for additional risks and poor performances from stocks.