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Health & Fitness

David Joy: Washington raises debt ceiling, ending government shutdown and avoiding default

After nearly three weeks of a federal government shutdown, and rising anxiety among investors worldwide, the U.S. Congress reached a deal to reopen government and restore its ability to borrow once again, averting the threat of default. President Obama signed the bill into law early morning Thursday, Oct. 17.

  • The U.S. Congress reached a deal to reopen government, restore its ability to borrow once again, and keep spending at current level through Jan. 15, 2014.
  • As expectations began to rise last week that a deal would eventually be reached, U.S. markets began to rally, and overseas markets had mixed reaction.
  • For longer-term equity investors, they should stay the course. Stock markets generally look forward, and the outlook for global growth is improving.

    Details of the agreement:

    • Fund the government at its current spending level, meaning the sequester spending cuts remain in-force through Jan. 15, 2014.
    • Extend the debt ceiling through Feb. 7, 2014.
    • Establish a bi-partisan budget conference committee whose job it is to reconcile conflicting budget proposals from the two parties by Dec. 13, 2013.

    The Republican strategy of forcing significant change to the Affordable Care Act largely backfired. The only concession it was able to achieve was the requirement of income verification for those applying for health insurance subsidies under the new law, which carries an individual insurance mandate.

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Market reactions are mixed
As expectations began to rise last week that a deal would eventually be reached, stocks began to rally, capped off by yesterday’s surge back toward all-time highs after the details of the deal began to emerge. The S&P 500 closed Wednesday at 1,721, higher on the day by 1.4% and just 0.25% below its Sept. 18, 2013 record high of 1,725.

Overseas markets had begun to rise in the days leading up to the deal as well. However, in the first full-day opportunity to react to the deal, overseas markets are mixed, with stocks rising moderately in Japan, Korea, and Taiwan, but lower in China. In Europe, stocks are mostly trading lower.

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The reaction in the U.S. Treasury bond market saw yields move lower. The ten-year note yield had risen to a recent high of 2.73% on Tuesday, and has since fallen 10 basis points in response to the deal. The reaction in the bill market, among securities that would have been most directly affected by any default, has been far more pronounced. The four-week bill due to mature on Nov. 14, 2013, which had seen its yield spike dramatically from 0.02% on Oct. 2, 2013, to 0.26% on Tuesday of this week, saw an equally dramatic decline back to 0.01% in Wednesday’s trading.

In other markets, the dollar is generally trading lower, sovereign bond yields overseas are moving lower as well, as anxiety levels begin to recede. Among commodities, prices are mixed, with metals and agricultural products moving higher and energy prices moving lower.

Disaster averted, for now
It is difficult to point to much that is positive about the government shutdown. Standard & Poor’s estimates that the shutdown cost the U.S. economy $24 billion, or 0.6% off fourth quarter annualized growth. Other private economists have lowered their fourth quarter growth estimates by as much as 1.0%.

While furloughed government workers will receive back pay under the agreement, overall consumer and business confidence has undoubtedly suffered as a result of the impasse. And the Fitch credit rating agency has taken note of the dysfunctionality in Washington, just as Standard & Poor’s did in August 2011 although no downgrade has yet been forthcoming.

Although the deal does get things up and running again, it also sets the stage for another round of confrontation just a few short months from now. Expectations that somehow things will then be different seem unlikely, making long-term planning for consumers and businesses alike problematic. Perhaps the best that can be said is that we have averted disaster, at least temporarily.

Longer-term equity investors should stay the course
The tragedy of this shutdown is that it occurred just as signs of a global economic upturn were beginning to emerge. Hopefully, the anxiety caused by the shutdown has only slowed that process, not derailed it. And that is more than likely the case.

For longer-term equity investors, they should stay the course. Stock markets generally look forward, and the outlook for global growth is improving. But, by the same token, it seems unlikely that markets will escape this episode unscathed.

The negative impact on fourth quarter growth will undoubtedly impact earnings expectations, which have yet to be adjusted lower. If that view becomes the prevailing one, stocks will move somewhat lower to reflect the damage done. Any price adjustment could be modest, however.

The uncertainty created by the shutdown will most likely keep the Federal Reserve on the sidelines through its October meeting, and perhaps through December as well. And that may go a long way toward limiting investor anxiety.

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