- September marks the end of the summer slump on Wall Street, and could also be the most crucial month of the year.
- Congress’ failure to pass a funding bill that keeps the government open is just one many risks that could rock global markets.
- Historically, stocks have rebounded after government shutdowns, and investors still flocked to Treasurys. But this administration imperils the market’s calm in a unique way.
September is a critical month for America and for Wall Street.
By month’s end, Congress must pass a bill to fund the government. Without it non-essential functions of the government could be shut down in October, and workers sent home.
Separately, the government also has to raise the debt ceiling — which is to say, Congress has to allow the government to keep accumulating debt. It was technically hit in March, but the Treasury Department has used so-called extraordinary measures to prevent a breach and a possible default. It has until early October before those options run out.
Also, the Federal Reserve, European Central Bank, and Bank of Japan all have meetings scheduled, and could announce important changes to their monetary policies.
“The ingredients for a volatile second half of September are certainly there, and it really comes down to whether or not Washington DC can get its act together,” said John Velis, the vice president of global macro strategy at State Street.
Shutdown? What shutdown?
Government shutdowns aren’t that rare. The last was in 2013 after Congress failed to pass a funding bill amid disagreements on the Affordable Care Act.
The stock market has historically rebounded quickly from the shock of a shutdown. In fact, stocks rose 3.1% during the 16-day shutdown in 2013.
The chart below shows that even the record 21-day shutdown that occurred in 1995/1996 barely impacted the bull market, which went on to last into the new millennium.
But amid stretched valuations and crowded popular trades, the calm that’s enveloped the market for months could be removed, State Street’s Velis said.
Hitting the debt ceiling could be a different matter. In the worst case, it would mean the US would lose its status as the world’s “safe” asset — a place where investors can be confident their debt will be repaid.
“A debt-ceiling event would take a lot of confidence out of the market,” Velis said.
“It would certainly be felt on the dollar. The dollar has been weakening for a variety of reasons, but this certainly wouldn’t make it more attractive if it looked like the US couldn’t do its basic functions as the provider of the reserve currency around the world.”
That’s not exactly what happened in 2011, as the debt-ceiling deadline approached — something that might be explained by what was going on in the rest of the world, Velis said.
“Investors were still looking first at what would be the safest asset in the context of a much larger episode of risk-off,” Velis said. This prized status has not changed since 2011, especially now that bond yields in some other developed markets are bordering on negative territory.
‘A bigger fear’
This time around, though, traders are already offering clues that they’re more worried about things. Treasury traders are demanding a higher premium for bills that expire around the speculated debt-ceiling deadline than they did at the same time in 2011, 2013, and 2015.
Also, yields of notes expiring mid-October are higher than those in the months after.
This shows “a bigger fear that there’s not enough cool heads that can prevail in the current circumstances,” Velis said. He added that Washington is now more unpredictable under President Donald Trump, who has publicly scolded members of his own party and has not scored a major legislative victory except the appointment of a Supreme Court justice.
However, the president may be able to avert a fiscal crisis. He is reportedly considering attaching additional disaster relief for Hurricane Harvey to a funding bill, making it harder for Democrats to vote against.
“In a perverse way, Hurricane Harvey may have actually saved the day,” Velis said.