The markets are shrugging the latest Washington budget fight
even though this one has resulted in a government shutdown.
Stocks were down Monday as the Congressional drama has unfolded,
but the bond market didn't show any nervousness. And stocks are
indicating positively at the pre-open. Bottom line: the markets
are telling Congress to grow up.
There could be a rational explanation for the market's
response. And that has to do with the market's calculus for how
the shutdown plays into the Fed's Taper debate. Friday's
September non-farm payroll report will most likely be delayed by
the shutdown, which means that the Fed's no-Taper caution was not
only justified but likely the right call.
The government shutdown may not have much of an economic
impact, particularly if it remains temporary. But the debt
ceiling issue is a big deal, and brinkmanship on that front will
be materially destabilizing for the markets and the economy.
Bottom line, the Washington fight has the potential of damaging
the economy and the Fed will most likely try to counteract it
through continuing with its existing programs, at least for
The stock market has had an amazing run thus far, despite
mediocre economic and corporate earnings momentum. The Fed's
continued support was the key differentiator that kept the market
on its uptrend. With the last quarter of the year getting
underway today, investors will be hoping for the trend to
continue as long as the Fed stays behind them. But can the Fed
afford to make no changes to its policy stance in the coming
months? The answer to that question isn't that clear, at least
not at this stage.
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