WisdomTree Minds on the Markets
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Minds on the Markets
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Minds on the Markets
Archive: October 9, 2023
Is D.C. Dysfunction Overrated?
To say it up front, we are not political strategists or satirists by any stretch of the imagination. However, given the ongoing headlines emanating from Washington, D.C., investors can be forgiven for trying to extrapolate what it all means for the markets and the economy as a whole. Given the numerous inquiries we’ve received regarding the current round of dysfunction in our nation’s capital, we thought it would be useful to opine from the areas of expertise that we are familiar with.
First of all, one needs to put in perspective the type of dysfunction we’re talking about. The debt ceiling debacle from earlier this year is in a whole different category than what has been making the headlines of late. Indeed, concerns surrounding the potential for the U.S. to default on its debt (a scenario we wrote about at the time as being rather unlikely) do rise to the level of appropriate concern.
However, what about a federal government shutdown? Although we all know the most recent round has been avoided, the shot clock is ticking for the next go-round. It is also important to remember that a debt ceiling and a shutdown are two entirely different things, even though they are sometimes lumped together. A potential government shutdown has nothing to do with the debt ceiling. Rather, it is strictly a budgetary issue that has no implications for whether the U.S. could potentially default on its debt. That being said, shutdown-related headlines can elevate the budget deficit as an issue for the Treasury market from a deficit-funding perspective. In other words, it highlights the fact that the U.S. is currently running trillion-dollar baseline shortfalls that need to be funded by…the Treasury market. So, yes, from a secondary vantage point, it can add to a rising yield trend, as we’ve seen recently.
But what about concerns from an economic standpoint? Yes, there are potential short-term implications, as we have seen during past shutdown episodes, but in terms of GDP, they seem to be measured more in basis points, not percentage points, and the negative effects can be made up for in the subsequent quarter’s GDP data. Interestingly, another negative outcome of a government shutdown could come from the release of economic data itself. The data being collected can be delayed, as well as the full economic reports themselves. With the Fed, and by extension, the markets, in full data-dependent mode, that could add a layer of unwanted uncertainty for both Powell & Co. and the markets. Certainly, with Fed policy currently very high on every investor’s radar, that is a situation worth avoiding.
Next up, last week’s historical removal of Speaker of the House McCarthy. We’ve also been asked about the potential ramifications of this development. While the uncertainty surrounding the “who and how long it will be to name the next Speaker” is not something markets typically embrace, this episode of dysfunction falls further down the pecking order when compared to the debt ceiling and even a government shutdown. A Speaker will be named eventually, and arguably, it will be back to business as usual for Congress.
For the latter two examples of dysfunction, we go back and ask ourselves the question of whether it impacts consumer and business behavior. Sure, there could be some near-term impact from a shutdown on the business side of the equation, but for the consumer, probably not so much. Think about it. Is the consumer going to stop going out to dinner, not go on a vacation, or not buy a new HDTV or other appliance because the government shut down or Congress doesn’t have a Speaker of the House?
Nevertheless, it is, unfortunately, the political landscape the economy and markets are currently confronted with. Our advice is to look to the labor market data for direction, and if the September jobs data offer any clues, perhaps D.C. dysfunction can be considered overrated.
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