Equity market investors be aware — the short-term threat level has been raised to amber.

While the big arguments over the outlook for stock markets have centred on President Donald Trump’s ability to win ambitious tax reforms and infrastructure stimulus, a more immediate question is looming. Can Congress avoid a shutdown of the federal government at the end of next week?

The odds of a budget agreement are good, but the way lawmakers get to a deal is going to matter as much to investors as the details. It is a safe bet that currently sanguine markets will be progressively more on edge as the April 28 funding deadline approaches.

With Republicans, Democrats and the White House all vying to keep their opponents’ policy priorities out of a deal, there is still the risk that talks go wrong and federal employees are put on furlough, just like they were for 16 days back in 2013. 

Economically-speaking, a short shutdown is neither here nor there, and even the stock market has gone through previous periods of budgetary brinkmanship without exhibiting a clear pattern of distress. An analysis by LPL Financial of the 18 shutdowns from the Ford administration onward found the average market move over the length of the shutdown was a fall of 0.6 per cent.

There are a couple of differences this time, though. This would be the first time in 40 years that the showdown is occurring in the spring, rather than in the September-December timeframe. More seriously, it would come at a time when political optimism is still baked into share prices.

For all the talk of the reversal of the Trump trade, the US equity market is off less than 2 per cent from its high and is still up 10 per cent since election day. Most forecasters have pushed out the date of the expected benefits from tax reforms, but fewer have reduced those expectations.

Any evidence that Washington cannot smoothly navigate more mundane issues of funding the government raises the spectre of clashes over items such as the debt ceiling later this year — and it risks disillusioning the business leaders on whose animal spirits equity bulls are relying.


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