October 14, 2013

Reid, McConnell Fight Next Round on Debt, Raising Hopes

Despite political ebbs and flows, Charles Schwab investor sentiment survey shows investors are focused on the long term

Senate Majority Leader Harry Reid, left, with Senate Minority Leader Mitch McConnell. (Photo: AP) Senate Majority Leader Harry Reid, left, with Senate Minority Leader Mitch McConnell. (Photo: AP)

With Congress failing to strike a deal over the weekend, the next round in the debt battle belongs to the Senate as Majority Leader Harry Reid and Minority Leader Mitch McConnell try to reach an agreement.

President Barack Obama was scheduled to meet at 3 p.m. with Reid, D-Nev.; Mitch McConnell, R-Ky.; House Speaker John Boehner, R-Ohio; and House Minority Leader Nancy Pelosi, D-Calif. That meeting was canceled at the last minute to allow more time to work on a deal.

A White House official told MarketWatch that the president scheduled the meeting in order to “make clear the need for Congress to act to pay our bills, and reopen the government.”

“We have had an opportunity over the last couple of days to have some very constructive exchanges of views about how to move forward," McConnell said Monday on the Senate floor. "Those discussions continue, and I share [the] optimism that we’re going to get a result that will be acceptable to both sides.”

Indeed, Joe Lieber of Washington Analysis noted in his Monday morning commentary that despite setbacks over the weekend, he believes the debt ceiling will be increased “in some fashion” by Thursday, partially influenced by the fact that Reid and McConnell, “who was instrumental in getting a deal in 2011, are talking and trying to work out an agreement.”

Said Lieber: “While there is no love lost between these two, we had worried that because of the difficult primary McConnell is facing he would be mostly absent from the negotiations, but that clearly isn’t the case. McConnell’s participation in the negotiations is nothing but positive.”

A few of the “major disagreements” to likely emerge from the Reid-McConnell negotiations, Lieber said, are “over discretionary funding levels and the duration of the debt limit and continuing resolution” to reopen the government.

Lieber went on to note that the two Senate leaders “understand that if they can't reach an agreement by today [Monday]”, Boehner “will be forced to produce his own debt limit legislation.”

As it stands now, Boehner is “indicating a six-week debt limit extension that could include provisions eliminating the health care subsidies for members of Congress, their staff and the White House,” Lieber said. “In addition, his bill would include income verification for those applying for healthcare under the [Affordable Care Act]. Absent a Senate bill, the House could vote as early as Tuesday on such a package.”

While political strategists like Greg Valliere believe a debt default can be averted, a deal will still simply “simply kick the can down the road, setting up still another shutdown crisis later this fall, then another during the winter, then another in the spring,” noted Valliere, of Potomac Research, in his Monday morning commentary. This, Valliere said, “will do real damage to the economy — business and consumer psychology will slump even further amid this persistent and corrosive uncertainty.”

The Dow Jones industrial average slumped Monday morning on news that the weekend didn’t produce a deal, but swung higher in the afternoon. Investors appear to not be overreacting to the daily political ebbs and flows.

On Monday, Charles Schwab released its client sentiment survey, which showed that despite the political wrangling in Washington investors continue to be focused on the long term. “The government shutdown has certainly led to some frustration for clients, but fortunately, most recognize how important it is to not overreact to daily headlines,” said Rodney Prezeau, senior VP of client experience at Charles Schwab & Co., in a statement. “That’s not to say clients aren’t carefully adjusting their strategies — we’re working with them in a variety of ways to fine-tune their portfolios and keep them on track.”

Schwab’s Q3 Investor Sentiment Survey, which polled more than 1,000 retail clients between Sept. 6 and Sept, 18, found that only 15% shifted their investing philosophy from the prior quarter. The survey found that more than three in five investors believe a market correction will occur in the next nine months, but nearly half (49%) think now is a good time to invest in equities, and 70% say they are engaged in managing their money.

“Many of our clients prefer to keep one hand on the wheel when it comes to their finances, so we’re having more conversations with clients and that appears to be boosting their confidence levels,” said Prezeau. “In fact, our survey showed that 70% feel most confident when they have ongoing or periodic advice from an advisor, rather than flying solo or completely delegating their financial decisions.”

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