It’s A Deal: An Update on the Fiscal Showdown

Throughout the recent fiscal showdown in Washington, D.C., I’ve maintained that hating the government, though sometimes understandable, is not an investment strategy. After a 16-day partial government shutdown and a great deal of drama in our nation’s capital, lawmakers once again validated the saying, attributed to Churchill, that the U.S. always does the right thing—after exhausting all other options. Markets responded to the news by retesting all-time nominal highs.

Predictably, Congress brought the crisis to an end at the eleventh hour, voting to fund the federal government through January 15, 2014 and raise the debt ceiling through February 7. Although opponents of the Affordable Care Act originally hoped to use the shutdown and the threat of breaching the debt ceiling as leverage to defund or delay the health care law, they ultimately won no material concessions.

Lawmakers also agreed to form a bipartisan committee to establish a 10-year budget blueprint that could alter the terms of the blunt spending caps, known as sequestration, enshrined in the Budget Control Act of 2011. While this new “super” committee’s failure would presumably result in no change to current spending limits, a bullish (perhaps Pollyanna) outcome might balance more rational cuts now with longer-term entitlement reform.

Looking ahead: Less uncertainty next time

While the short-term extensions of government funding and the debt ceiling might appear to set the stage for a repeat confrontation in a few months, the game appears to have changed. The outcome of the latest crisis strongly suggests that this Congress, no matter how heated the rhetoric may get, is not actually willing to risk the country’s access to global credit markets. Moreover, the deal includes the “McConnell Rule,” which gives lawmakers only the opportunity, subject to a presidential veto, to disapprove a debt ceiling increase rather than requiring them to approve it. Consequently a simple majority could vote against raising the limit, but the debt limit would rise absent a two-thirds majority vote to override the veto.

These two factors—proof that the current Congress lacks the votes to breach the debt ceiling, and the McConnell rule—combined with the drubbing that pro-shutdown/anti-debt ceiling members have taken in national polls, all but ensure that we won’t find ourselves in the same precarious position next spring.

Markets: Now, back to our originally scheduled programming

Uncertainty being the enemy of financial markets, the resolution of the standoff spawned a modest rally in risk assets. Modest in part because much has changed since 2011 when the last debt ceiling standoff produced a huge market swoon and subsequent rally. U.S. deficits are today dropping rapidly, and the global economy is generally stronger. With the Washington drama behind us, I’d urge investors to put the headlines aside and focus on the global opportunities before us.

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RP.101813

Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic factors. Investments in emerging and developing markets may be especially volatile.

Past performance does not guarantee future results.

 

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