Gridlock Could Prove Perilous for Stocks, Debt Ceiling Vote Looms
Source Newsroom: Creighton University
Robert Johnson was the Deputy CEO and Senior Managing Director, CFA Institute prior to returning to teach at Creighton University's College of Business
Johnson's bio: http://business.creighton.edu/faculty/johnson-robert
availability: phone and email
Will the government shut down have an impact on the markets and the economy? Yes and no according to Creighton University Finance Professor Robert Johnson.
Johnson’s research shows that stocks do better during political harmony, which is certainly not the case today. On the other hand, bonds perform better during political gridlock. (research cited in this Reuters story from late yesterday http://www.nbcnews.com/id/53168807#.Uk2OTyT0FJk)
From an economic standpoint the shut down is not that damaging to the economy, though of course the longer it continues the greater is the impact. Certainly on a micro level the shut down is significant to some people and the service, but for the financial markets and the economy as a whole, it isn’t a major event. Markets definitely dislike uncertainty, and the longer the shut down drags on, the more uncertainty there is.
What would be devastating to both the economy and the financial markets is if Congress fails to raise the debt ceiling later this month. The real angst being felt by the markets is with respect to the debt ceiling and if the politicians work together to keep the government running, it may bode ill for the debt ceiling issue. In other words, this is all a precursor to the looming vote on the debt ceiling
If the government shutdown is resolved in the next week and the debt ceiling is raised – eliminating the uncertainty – Johnson believes that a substantial rally in the market – in the neighborhood of a thousand points on the Dow – may occur by end of the year.
“I don’t want to even contemplate what would happen if the debt ceiling is not raised and the US actually defaulted on its sovereign debt. It would be an unprecedented and cataclysmic financial event and would be devastating to the economy and the markets. It could rival the financial crisis of 2007-2008,” says Johnson.