In the meantime, and before Oct. 17 comes to pass, volatility will likely be on the ascent in a market with limited memory from day to day. Even if we don't go into technical default, the next few days will be high theater.
Our Economy Is Vulnerable to Political Dysfunction
Given that the U.S. recovery is barely at escape velocity and that it can be argued that the weak trajectory of growth is still not self-sustaining, it remains uncertain how vulnerable the domestic economy is to the high drama in Washington. In all likelihood, the longer the stalemate continues the more significant the dent to business and consumer confidence. The two previous budget impasses had a more adverse impact on the U.S. stock market and on economic growth than what we have seen this time (further confirming my view about the current level of complacency). The bottom line is that we must question whether the risk is that three strikes of budget impasses (over the past several years) and the (fragile) economy is out. Ten days from now, in all likelihood, there will be a resolution in Washington. And, at that time, we can again refocus on the challenges to sales and corporate profits in the upcoming quarters, which could pose an even larger threat than the debates on budget and debt-ceiling issues.
No Taper Until March 2014
Meanwhile, it is important to recognize that the current shutdown will bring a continued halt to the release of government economic data. If I am correct that the decision comes close to Oct. 17, the economic data vacuum will make it difficult for the Fed to properly assess the economic condition on a timely basis. But even after a possible budget resolution (after Oct. 17) the economic data will grow more ambiguous, further complicating its interpretation by the Fed. This probably means that a tapering is unquestionably off the table this month and, in all likelihood, off the table in December. The first opportunity after December is January 2014, but I wouldn't rule out March 2014 as the month that a tapering is finally initiated.