New York (CNN) Wall Street doesn’t have to worry about a time bomb in Washington that threatens to blow up the global economy. that could be a problem.
Debt ceiling-inspired declines are almost non-existent. The Nasdaq is still up an astonishing 22% annually.and CNN’s Fear and Greed Index The change in market sentiment is approaching “extreme greed” mode.
Perhaps this indifference is because investors have seen this drama before. they know how it ends. Politicians wait until the last minute before giving in and ultimately raising the debt ceiling before disaster strikes.
No one wants markets to panic and unnecessarily scale back millions of Americans’ 401(k) plans, stay-at-home plans and college savings plans. Unfortunately, there is a growing sense that some disruption may be needed in the market.
Mark Zandy, chief economist at Moody’s Analytics, told CNN on Monday, “We need a downturn in the stock and bond markets for donors and voters to knock on lawmakers’ doors to stop the drama and raise the cap. maybe,” he said.
On Friday, the White House and Republicans seemed close to reaching a deal on a debt ceiling, but negotiations unexpectedly fell apart.
But even the news of that setback was greeted with a collective shrug on Wall Street. Stocks retreated from their highs, but the Dow ended the day down just 109 points (0.3%). That doesn’t get people to call lawmakers.
In a way, the calm mood in the market works like a feedback loop. Investors are betting that everything will be resolved. Lawmakers are in no hurry because the market is not in turmoil. Rinse and repeat.
“Both parties may need to see growing market turmoil before reaching a deal,” said Nicholas Collas, co-founder of DataTrek Research.
Market drop in 2008 forced a redo of TARP
History shows that market turmoil acts as a coercive mechanism, forcing lawmakers to take tough unpopular votes.
for example, Dow plunges 778 points Sept. 29, 2008, after the initial rejection by the House of Representatives — or nearly 7% — The distressed asset relief program known as TARP.
The message was delivered loud and clear. House came back a few days later, approved a controversial relief program.
In 2011, one of the worst defaults in U.S. history, markets were volatile in the days and weeks before Washington reached a last-minute deal to raise the debt ceiling. More selling then occurred as investors became uneasy about the drastic spending cuts and an unprecedented credit rating cut by S&P.
None of this is to say that the market is completely ignoring today’s debt ceiling drama.
Beneath the surface, there are signs of concern. The cost of insuring U.S. government bonds has soared since the beginning of the year. And interest rates on Treasuries maturing this summer have surged as investors fear they won’t be paid on time.
“I don’t worry enough”
Still, the stock market isn’t daunting at high levels, at least for now. And that means no one under the Washington authorities is lighting fires.
“What worries me is that we don’t have enough worries today,” said Ed Mills, a Washington policy analyst at Raymond James. “For a long time I believed that DC would respond when there was a crisis or a deadline. We didn’t necessarily agree on the deadline. has not reached.”
Mill said the issue is not just reaching a high-level deal between President Joe Biden and Speaker of the House Kevin McCarthy. She aims to get lawmakers from each of Biden’s and McCarthy’s parties to sign the deal, if any.
“The final compromise is really hard, and for it to be truly bipartisan, you have to compromise more than someone or both parties want,” Mills said.
That’s where the market drop that creates a sense of urgency could help.
Of course, this does nothing to increase the popularity of Congress.
The debt ceiling is a fabricated crisis that authorities could have dealt with months ago. But they’ve instead decided to wait until the last minute to work it out – but probably not until it shrinks an actual human nest egg first.
