Washington is beginning to coalesce around the familiar fear that Congress will not raise the debt ceiling, meaning the United States government would not be able to meet its debt obligations for the first time in history.
“The debt ceiling crisis will become very real very soon,” Potomac Research Group’s Greg Valliere warned clients. Treasury Secretary Jack Lew has set the very soon deadline for October 17.
But if the headwind is coming, markets haven’t seen it yet. “We look at options prices for the S&P 500 as well as stocks with the highest revenue exposure to government, finding that relatively little fear is priced in,” wrote Goldman Sachs’ Robert Boroujerdi.
In other words, Wall Street isn’t scared this time.
Barclays’ Barry Knapp has a similar take. He even sardonically included the following proverb in his note to clients: “‘In any dispute the intensity of feeling is inversely proportional to the value of the issues at stake’ -Sayre’s Law.” He explains:
While our introductory quote sounds cynical and we are by no means dismissive of the long-term risks of the large increase in U.S. federal government debt, we think the risks to the markets of a government shutdown and/or reaching the debt ceiling are significantly lower than in the summer of 2011. Further, we think there is a high probability of an outcome later this fall that will be welcomed by the growth sensitive equity market in stark contrast to the 2011 debt ceiling debate when the equity market bore the brunt of the selling.
What gives? Why is 2013 different than 2011? First, the risk of U.S. sovereign downgrade risk is lower than in 2011, according to Knapp. Also, the support from the Federal Reserve is stronger this time:
In 2011, QE2 ended and Operation Twist was not yet in place, thus the Fed’s balance sheet was on hold. Up until last week’s Fed decision, we believed the equity market was much more at risk to wrangling in Washington. However, with the Fed’s decision to not SepTaper — noting fiscal concerns — and still supporting the portfolio balance channel, we believe the equity market is less vulnerable.
Knapp is referring to the Fed’s surprising call to not taper its asset purchasing program known as quantitative easing. It appears the upshot of that decision has been a calming of market jitters over fiscal matters, which was one of Chairman Bernanke’s intentions.
But overall, 2013 is just not as worrisome as 2011. Knapp points to this chart showing an improved fiscal situation.
None of this is totally satisfying, but in a comment to Business Insider, Dave Lutz of Stifel, Nicolaus basically summed up the mood on Wall Street. The antics have gotten old, though maybe there are some signs of stress creeping in.
I tend to think Wall Street has gotten numb to the antics out of a very partisan DC process. The Current fight (Budget to keep government running) seems to be a non-event to the market, except for some defence contractors – higher focus is now on the Debt Ceiling, which we could hit in Mid-Oct – as a key event. Seeing stress building in the 4 week notes right now that come due, right when the government is out of money to pay the coupon
So far, the stresses building in the market aren’t grabbing headlines, but if history is any guide we should get some real market freakout before it’s all over.
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