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Washington gridlock and a debt-ceiling showdown are weighing on the market


U.S. Senate Majority Leader Chuck Schumer (D-NY) talks with Speaker of the House Nancy Pelosi (D-CA) on the steps of the U.S. Capitol.

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The U.S. stock market is on track to post its worst day in months. U.S. Politics are partly responsible.

With the Dow Jones Industrial Average down 870 points in afternoon trading — on pace for its worst day since October — and the S&P 500 shedding more than 2%, strategists say gridlock on Capitol Hill is starting to send shutters through the market.

The S&P 500 is down 2.5% and on track for its own worst session since January.

Strategas Research Partners head of policy analysis Dan Clinton said Monday that Wall Street seems increasingly certain lawmakers won’t fix the debt ceiling soon.

He wrote that while much of the above is headline and short-term risk, Washington’s policy framework is now shifting towards more risk following 18 months of unrestricted fiscal and monetary policies. The consensus now thinks that the debt limit will be increased in October’s second half. This would mean a last-minute decision and additional months of discussion about debt ceiling breaches or prioritization of government spending.

The U.S. will go into default immediately if Congress doesn’t suspend the borrowing limit or raise it before the “drop dead” date. While the Treasury Department has not yet established a “drop-dead date”, they estimate that it will occur sometime in October.

House Democrats plan to hold a vote this week on a piece of legislation that would suspend the limit and fund the government for a matter of months beyond the end of the fiscal year when it ends on Sept. 30.

Republicans said that they wouldn’t support Democrats lifting the borrowing limit to protest the proposed trillions in spending by the Biden administration.

In a press release, Nancy Pelosi (D-Calif.), stated that the House of Representatives would pass legislation this week to fund the government until December of the year in order to prevent a government shutdown that could harm American families.

She added that the legislation to prevent a shutdown of government will include the suspension of the debt limit until December 2022 in order to fulfill our obligations once more and preserve the full faith, credit and sovereignty of the United States. The American people demand that our Republican counterparts live up to their responsibilities. They must pay back the debts they helped to incur as part of the December 2020 COVID package ‘908’. This COVID package helped small and medium-sized businesses and families in distress from the COVID crises.

Most likely, the Senate will be the biggest hurdle. There lawmakers must gather 60 votes in order to pass a bill which isn’t linked to separate reconciliation legislation.

The debt ceiling cannot be raised or suspended, but it does allow for additional fiscal spending. Raising or suspending the debt limit is not equivalent to increasing the national credit card balance.

Importantly, even if the Biden administration hadn’t authorized any spending — even if Congress had passed zero bills in 2021 — lawmakers would still need to lift the ceiling to pay for legislation passed in prior years.

“The U.S. never defaulted. No. Doing so would likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency,” Treasury Secretary Janet Yellen wrote in an op-ed over the weekend.

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“Default could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil,” she added. The current economic recovery will end in recession. This would result in billions of dollars worth of growth, and thousands of jobs being lost.

Although lawmakers may avoid technical default, an extended last-minute dispute over the debt limit could result in another downgrade to the U.S. debt rating. This is similar to the 2011 event. The mere specter of default led Standard & Poor to downgrade U.S. sovereign credit, which in turned whacked demand for Treasurys and pushed yields up.

Investors aren’t just concerned about the borrowing limit.

Art Hogan of National Securities, chief market strategist, said that instead of growing anxiety over the debt limit, investors are more concerned about Covid-19’s delta variant, inflation, and the future of the Federal Reserve, as well as the possibility of a collapse in easy Federal Reserve policies.

Hogan stated that the market is closely monitoring the Democrats’ push to raise $3.5 trillion for the social safety net and the bipartisan effort by the Democrats to fund $1 trillion of infrastructure spending.

However, Hogan said it was not unusual to see Congress halt the passage of the $3.5 billion bill.

Hogan sent an email stating that there seems to be consensus about the fact that some, but not all, of the spending plans will be passed. There will likely be some tax increases, but not to the extent currently being considered.

Hogan noted that September is usually a turbulent month in markets. And 2021 is no different.

He wrote that it felt like markets have become more concerned about potential headwinds than they are about the things driving them. Market participants don’t have any new concerns, however, they can be seen through the prism of September, which has historically been a difficult month for the markets. As such, it seems like the market is reaching a crescendo.

The Dow and S&P 500 have each lost more than 4% in September.