With at least a temporary end to the budget showdown that has kept the government closed for weeks and the U.S. on the brink of default, stocks soared yesterday afternoon, with the S&P 500 closing within 1 point of its all-time high.
It’s certainly not surprising that the markets would rally on news that the U.S. will avoid default, but what has some market watchers scratching their heads is why the market didn’t perform worse before the standoff was ended Wednesday evening. In fact, from the time Ted Cruz gave his filibuster speech on September 25th through October 15th — the day before a deal was reached — the S&P 500 actually rose slightly.
So what explains this? One reason might be that Wall Street has just learned to ignore Washington. That’s the line Jim Paulsen, chief investment strategist at Wells Capital Management is taking. He tells CNBC:
“This one verges on an economic and financial joke. This is just a bunch of politicians acting badly . . . Two years ago, when the economy was in a fragile mental state, it might have gotten a reaction. Now we’re battle weary and tired of the boy who cried wolf.”
Paulsen’s metaphor of the boy who cried wolf may be apt. After all, this is the third debt ceiling showdown we’ve seen in just over three years, and each time the U.S. reaches the brink of default, the antagonists in Washington stand down.
But not everyone is so sanguine. According to Gary Thayer, Chief Macro Strategist at Wells Fargo Advisors, “There was a lot of anxiety and markets were really pulling back until about a week ago.” Thayer argues that Wall Street really saw the tension in Washington lessening late last week, when it became clear that President Obama would eventually negotiate over a larger budget deal, and that Republicans wouldn’t be able to maintain their hardline stance on Obamacare for much longer. “I think investors are encouraged by the situation we’re heading into, and that it won’t be just kicking the can down the road,” he says.
Another factor: the economy is in a much better place that it was during either the past two budget battles. And just because the market didn’t tank over the past two weeks doesn’t mean that it wasn’t feeling the effects of the shutdown. Jonathan Golub, Chief US Market Strategist at RBC Capital Markets argues that there’s been a lot of good news of late outside the government shutdown that should have sent the markets soaring. ”We are looking a very very positive backdrop for for stocks,” he says. “And the Fed is part of that but also a lot of economic data has been really turning up and pointing to a stronger environment.”
Golub argues too that market participants did think there was a chance, however so slight, that Washington would fail to come together for an agreement:
“When i spoke to investors the general assumption was that this thing was so potentially damaging that you had to bet that cooler heads would prevail but there was a very small chance that when you’re negotiating at the very end that something can go wrong that wasn’t intended.”
In other words, Wall Street might hope that it can ignore the constant bickering in Washington, but the fact remains that a major problem in in the nation’s capitol still has the potential to seriously wound the overall economy. And while Wall Street might be getting more used to the heightened rhetoric that has dominated the government over the past several years, it can never fully trust that rhetoric is all that it is.