It’s not just quiet on the floor, it’s quiet everywhere. That’s not new, but as we go into the August index options expiration and the September quadruple witching, things could start to change fast. In the world of “what goes up must come down,” the final 4 months of the year could get very volatile. With the prospects of the Fed tapering its quantitative easing program, the S&P up 18% on the year and the historically “spooky” months of September and October, it may be time to get your chinstraps out. After taking all of August off, plus the first week of September and the third week of October, Congress has a whole list of things to accomplish (or fail to accomplish).
Student loan reform
After a few months of trying to figure out the student loan problem, Congress finally came up with a solution, pegging loan rates to the Treasury market rates, in what is essentially a massive refinance. After Congress failed to enact a reform over the summer, doubling monthly payments, a reform would free consumers to start spending again, which is good for our consumer-driven economy. It would also encourage more people to go back to school, without the fear of both iffy job prospects and crippling debt upon graduation.
Budget showdown and “Sequestration II”
But it’s not the college loans that loom over the markets, it’s the pending battle over the federal budget. At a time when the stock market is sitting on new contract highs, the investors are again looking at another budget “showdown.” While last December’s showdown over tax policy was unpleasant, it ended up being just another bump in the road to S&P 1700. As you may recall, the deal was struck at the last minute on New Year’s Day, which sparked a big rally in the S&P.
And remember that this year’s budget showdown comes before a midterm election. Members of Congress want to go home and campaign on having fought for or against this or that scheme, even if the bill they voted for was a meaningless resolution guaranteed to fail. Thus, a 41st attempt to repeal the Affordable Care Act (Obamacare) and a bill to cut the Supplemental Nutrition Assistance Program (SNAP) in half will take up time. After confirming several of the president’s unfilled nominations, including the ATF directorship, the Senate is likely to return to filibuster threats and anonymous holds.
A do-nothing Congress still does something to the economy
So while the market is unlikely to get spooked by the word “sequestration,” the long-term impact of another do-nothing Congress may weigh down optimism about the economy. We have had 41 straight months of private sector job growth, yet the effect is blunted and the big number stays above 7.
And many in Congress would prefer to run against a bad economy than build on what’s already working. Despite Congress having approval ratings lower than those of lice, cockroaches, and North Korea, redistricting and the massive unknown flows of money (some of it foreign) thanks to Citizens United guarantee that most of them will be re-elected.
And some, like Rep. Michelle Bachmann(R) of Minnesota, are retiring, which means they are really campaigning for their jobs as lobbyists, think tank consultants, and TV stars. Historically this has made outgoing members fearless, some would say shameless, in their willingness to throw bombs on their way out the door.
Just the two policy issues we mentioned, student loans and the budget showdown, could have a tremendous impact on interest rates and stock markets, respectively. Unlikely to get any attention at all are things like the looming, massive cost of caring for our wounded veterans returning from the soon-to-be-finally-over war in Afghanistan.
Fasten your seatbelts
We are not there yet, but the S&P and markets in general are heading into a turbulent time. Some stock rotations are starting to show some of the market leaders making lower highs. With so many major decisions to be made over the next several months, it looks like our elected officials not only took all of August off but there is a lot of time off coming in September and October. And an increasingly cynical public, that thinks Congress is worse than cockroaches, may conclude that the less they do, the less damage they’ll do.