The Ceiling Is Falling, Wall Street Scoffs at Chicken Little
NEW YORK (TheStreet) -- Senate Majority Leader Harry Reid was correct in saying that the eyes of the world were on Washington this week, but he failed to mention that the men and women across the globe who move markets called their bluff.
From the Oct. 1 government shutdown until the market close on Wednesday the S&P 500 rose 2.4%, despite repeated collapse in negotiations to raise the nation's borrowing limit and President Obama's warning that Wall Street should be worried about Congress' inaction.
"This was a pretty mild reaction this time around," said Russ Koesterich, chief investment strategist at BlackRock (BLK - Get Report) in a phone interview. "We didn't really see that much panic; it didn't really feel like that a couple days ago, but compared to what happened in 2011 this was really mild."
The Chicago Board of Exchange Volatility Index, which gauges market expectations for 30-day volatility in S&P 500 index options, hit a high of 21.34, whereas the so-called fear index in July 2011 peaked at 25.94 on the final trading day before House Republicans agreed to raise the debt limit.The S&P 500's worst performance during the 2011 debt ceiling crisis registered a 2% loss, whereas this year's worst day was a 1.2% drip that was offset two days later by the second biggest gain of 2013 -- a pop of 2.2%. Tea party Republicans' steadfast opposition in 2011 to raise the nation's borrowing limit and force a default surprised many people on Wall Street and Main Street as the issue had not triggered a protracted debate since at least the 1970s. In other words, it was an unfamiliar experience for many, if not most, market participants. Compounding worries was deep uncertainty about the fate of the eurozone, which was reeling from the European sovereign-debt crisis and its subsequent recession. This time around, markets shrugged at the prospect of a government default. European Central Bank President Mario Draghi shrugged last week when asked at the Economic Club of New York his opinion about the looming debt ceiling. "The world still does not believe the United States will not find a way out of this," Draghi said. With experience from which to draw an idea of how a divided Congress would handle another debt limit clash, investors this time around ignored threats by tea party Republicans. It didn't help the majority party in the House of Representatives that it chose to make a stand against The Patient Protection and Affordable Care Act -- a law passed by the legislative branch, signed into law by the executive branch and upheld by the judicial branch. -- as the centerpiece of concessions demanded from Democrats in order to avoid shutting down the government. This most recent spat, like the 2011 incident, resulted in Congress raising the debt ceiling, but it could signal new precedent. One such scenario could involve a Republican president and a Democratic-controlled House. Theoretically, it could come in the form of Democrats who want to change gun control or immigration reform and demand a commitment by the Republican president before the party agreed to increase the debt ceiling, according to Bruce Oppenheimer, a political science professor at Vanderbilt University. Oppenheimer compares it to the emergence of filibusters. "Filibusters weren't very useful tools until about 1970, so they weren't used," he said. "Once they became a useful weapon it legitimized their use, and I think if this had succeeded it would have potentially set a precedent." The short-term resolution will increase the debt ceiling through Feb. 7, 2014, which leads investors to believe the United States could continue to witness more of these debates. But it may be unwise for representatives and senators posturing on Capitol Hill to assume future debt disputes will raise either party's beltway clout. The opposite effect may occur. "There is a growing sense among investors that, 'You know what, every time this happens I get a little bit more immune to it, and I feel like I've seen this movie before, I'm not going to panic'," said BlackRock's Koesterich. That, of course, would be the case until someone or a group decided there was enough political influence to gain by allowing a default. "If we ever really go past one of these deadlines, you're likely to see a very violent reaction because no one would have thought it possible," said Koestrich. -- Written by Joe Deaux in New York. >Contact by Email. Follow @JoeDeaux
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