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With Shutdown, Fears of a Nightmare on Wall Street

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The government began shutting down for the first time in 17 years, as lawmakers were unable to reach an agreement late Monday night after an intense budget fight over changes to President Obama’s health care law.

At 8:45 p.m. on Monday, the House voted 228-201 in favor of a third version of a short-term extension of government funding that was linked to a one-year delay in certain aspects of the 2010 Affordable Care Act, a measure that Obama has threatened to veto. About an hour later, the Senate rejected the most recent plan on a 54-46 vote, sending it back to the House.

The U.S. dollar and shares in Asian and European equity markets remained mostly steady on Tuesday, despite concerns that a shutdown would mean that 800,000 federal workers would be furloughed and more than a million others would be asked to work without pay, threatening the nation’s economic growth.

In a speech at the White House late Monday afternoon, Obama said, “Should Congress choose to shut the people’s government down” it would “throw a wrench into the gears of our economy.”

Calling the House’s actions “the height of irresponsibility,” Obama said that “one faction of one party in one House of Congress in one branch of government doesn’t get to shut down the entire government to refight the results of the last election.”

Referring to Obamacare, of which the open enrollment process begins Tuesday, the president pointed out that “an important part of the Affordable Care Act takes effect tomorrow, regardless of what Congress does today—you can’t shut it down.” While Obama promised that he would be “willing to work with anyone to make the Affordable Care Act work better,” he nevertheless argued that “you don’t get to extract a ransom for doing your job or because there’s a law you don’t like.”

The S&P 500 closed down by roughly 0.6%, to 1,682, on Monday, while gold prices slipped 0.5%, to $1,332 per ounce. Last week, the S&P hit 1,692, a trading level that’s just 2% off its all-time highs. And current political concerns prompted market strategist Bob Doll of Nuveen Asset management to say the government is close to shutting down its nonessential operations.

“If we don’t let this pass soon, we could have looked at the high for the S&P 500 at 1,729,” Doll said on CNBC early Monday. “I don’t want to say that yet. But there’s enough noise around this, and the debt ceiling is still in front of us, the market won’t like it.”

“Growth wasn’t strong enough. Inflation wasn’t strong enough. Underneath the surface, I think [Fed Chairman Ben] Bernanke was saying, ‘I smell shenanigans in Washington and it’s not the right time to taper,’” Doll said of the recent Federal Reserve decision to continue its quantitative-easing policy.

Though he admits that a shutdown would most likely be short, the situation for the U.S. economy remains quite precarious. The Fed didn’t “want to do any damage to an economy that’s already not quite strong enough,” Doll said.

In a note to clients mid-Monday, titled “On the Brink,” Bank of America (BAC) economic analyst Ethan Harris warned about three “dangerous dynamics: (1) the shutdown lasts long enough to do serious damage to the economy (so the relief trade is weaker than the sell-off), (2) there is a technical default on the U.S. debt, and (3) a market correction is needed to convince Congress that it is making a serious mistake.”

The large sell-off around the last debt ceiling fight, Harris points out, came several days after a deal was signed “when the S&P downgraded the U.S. debt, triggering a 6.7% one-day stock sell-off.”

The debt-limit debacle of 2011, he adds, came hand in hand with a 19% drop in the equity markets.

Metals Weakness

The general economic fragility combined with the possibility of a shutdown affected how investors look at metals prices as well. They rejected gold as a safe haven and sought other sources of possible cash on Monday, experts said, noting that gold did rebound a bit last week.

According to ETF Securities, the precious metal ended the week down 0.6%. It’s also down about 5.5% for September and 19% year to date.

Also on Monday, Guggenheim Investors released an investor survey showing that they remained very concerned about the current yield environment and the near-term uncertainty of the U.S. economy. Still, they seem upbeat about the future of fixed income, with the majority of respondents getting their fixed-income exposure through mutual funds (63%) and/or individual bonds (38%) and ETFs (21%).

The poll of 1,000 investors — conducted Sept. 9, well before the shutdown crisis — found nearly three-quarters of investors (72%) viewed fixed income as a source of stable, consistent income streams and protection for the principal value of their portfolio (49%).

These views differ from investor behavior in August, as tracked by Cerulli, which found mutual fund outflows, mainly in fixed income, hit nearly $8 billion. Mutual funds in nontraditional bond categories and bank-loan strategies topped the outflow list, losing $12.6 billion.

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