By Wallace Witkowski, MarketWatch
Now that the expected tapering of $85 billion a month in asset purchases fizzled out at the Federal Reserve’s September policy meeting, investor attention has shifted to the brewing showdown over the budget and the debt ceiling.
Already the House has thrown down a gauntlet to the Obama Administration, passing a budget bill that keeps the government running through mid-December but guts funding for Obama’s health-care law. Without a budget by Oct. 1, when the government’s fiscal year 2014 begins, a shutdown becomes a real possibility.
Adding to pressure is a Congressional Budget Office report in the past week showing that national debt is now 73% of GDP and that the federal budget “cannot be sustained indefinitely.”
“It appears a government shutdown is ripe,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. “Investors need to be cautious about that.”
Stocks finished the week higher despite a big Friday pullback, with the Dow Jones Industrial Average /quotes/zigman/627449 DJIA -1.19% up 0.5%, the S&P 500 Index /quotes/zigman/3870025 SPX -0.72% advancing 1.3%, and the Nasdaq Composite Index /quotes/zigman/12633936 COMP -0.39% ahead 1.4%. Both the Dow industrials and the S&P 500 closed at their all-time highs Wednesday after the Fed scrapped plans to taper in September. Who’s going to blink in D.C. if the Fed doesn’t?
It’s that very uncertainty over how elected officials will act -- or, not act -- that pressured the Fed not to pull the trigger on the taper. All this time, the central bank has said it would begin ramping down easing measures as the economy improves. Fed Chairman Ben Bernanke said in the past week that another debt ceiling debacle or a government shutdown would be a big headwind on the economic recovery.
While St. Louis Fed president James Bullard said on Friday the taper is still on the table for October if jobs data improves, market strategists are skeptical the Fed would change its mind over the course of a month.
Brian Belski, chief investment strategist at BMO Capital Markets, doesn’t think the Fed will bother with tapering this year, pushing it out to 2014. It’s on that basis that he bumped up his year-end S&P 500 target to 1,800 in true “don’t fight the Fed” fashion. Keep in mind, when the “Fed decides to start taking away the punch from the bowl,” stocks will drop in the short term, he said.
While Belski thinks the debt ceiling will be raised again, with some sort of compromise reached, he thinks Bernanke is more worried about the economy than he is letting on, especially given how the first talk of the taper in May threw cold water on stocks.
Given that job gains are essential to the economic recovery, the central bank may be reluctant to rock the boat with regards to markets, especially with corporate America putting together its 2014 budgets, Belski said.
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