Dan Greenhaus of BTIG thinks that Wall Street might be sleepwalking into what’s looking more and more like a real economic disruption.In his note tonight, he says that a government shutdown should practically be assumed, and that an increased fiscal drag (due to the sequester kicking in) should probably be factored in as well.
It got only modest attention — more evidence that Wall Street is tuning out K Street — but Politico’s lead story this morning said that “The idea of allowing the country to default by refusing to increase the debt limit is getting more widespread and serious traction among House Republicans than people realise, though GOP leaders think shutting down the government is the much more likely outcome of the spending fights this winter.” (The WSJ touches on this as well). At this point, we have to assume the government shuts down, even if temporarily and in coming days, we’ll have more on the economic/market effects of the last government shutdown. In addition, if Republicans opt to allow sequestration to take effect as planned rather than agree to a deal without “significant” spending cuts, we would have to revisit our market/economic forecast. It might have been reasonable to assume the spending cuts wouldn’t take effect until later in the year or even 2014. That seems increasingly less likely and if so, the fiscal drag on the economy in the second half would be larger and by extension, the outlook for (select areas of) the equity market more difficult.