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October 06, 2013 at 06:59 PM
Memo to the President and Congress: The stock market doesn’t care about your shutdown nonsense. But it does care about the debt limit.
Stocks shrugged off the first full day of the historic 2013 government closure. The Dow Industrials added 0.41%, the S&P 500 gained 0.80%, and the Nasdaq composite jumped 1.23%. The stock market virtually aped its historical performance during the last two government closures in 1995 and 1996.
But one day’s performance doesn’t necessarily make a trend, nor does it mean financial markets will forgivingly tolerate everything the government does.
During 2011, the debt ceiling brouhaha, something happened that we shouldn’t soon forget. As politicians on both sides of the aisle were bickering, the S&P 500 (SPY) swiftly declined 16.58% from July 22 to Aug. 8.
That provided a clear message: Financial markets don’t like political grandstanding, particularly when it impacts something as meaningful as sovereign debt.
This time around, the U.S. Treasury’s borrowing limit is exhausted on Oct. 17, and the Congressional Budget Office estimates the government won’t have enough money to pay its bills sometime between Oct. 22 and Oct. 31.
Debt Dilemma
Will Democrats and Republicans be able to agree on a believable plan for tackling national debt?
Basically, Congress is stuck with two choices: increasing the debt limit or defaulting on it, with the former being the best of the worst possible choices.
Congress has raised or suspended previous limits five times under the Obama administration. Raising the debt limit or suspending it has been the modus operandi of Congress on 79 separate occasions since 1960. (After 53 years of practice, they’ve sure developed a real knack for it.)
On the other hand, a debt default is the worst of worst choices. Not only would it roil the appetite for U.S. debt, but it would trigger another credit downgrade for the nation.
