Wall Street is betting the government won't shut down

Trump's budget dilemma

As President Donald Trump pressed for funding to start building his much-ballyhooed border wall, Wall Street has been scaling a wall of its own, lifting the Nasdaq above 6,000 for the first time and pushing the S&P 500 up more than 6 percent this year.

On Monday and Tuesday, the stock market rallied, with investors cheered by election results in France, corporate earnings and thoughts of tax cuts ahead.

The threat of a government shutdown on Saturday did little to dampen sentiment, even though an appropriations bill that has been funding government operations since December lapses Friday at midnight.

“There are so many questions that investors face right now, but we tend to climb a wall of worry,” said Jim Russell, a principal and portfolio manager at Bahl & Gaynor, which manages $18.7 billion of assets for clients. “Markets are likely to sag a bit should it look like the government will indeed shutdown. Stocks simply do not mix well with uncertainty.”

Trump may be willing to put border wall proposal on hold

As lawmakers worked to negotiate a spending bill that would avert a shutdown on the 100th day of Mr. Trump’s presidency, several contentious issues entered the mix, including the Affordable Care Act (ACA) and funding for the Mexican border wall.

“President Trump’s eagerness for a major accomplishment in his first 100 days has thrown a wrench into the process,” Oxford Economics economists Nancy Vanden Houten and Gregory Daco, wrote in a note to clients. 

A shutdown could cost the economy 0.1 percentage points of GDP growth, or $6 billion, per week, they estimate.

Still, investors believe a shutdown will be avoided, even if the odds of one have increased.

“We’ve gotten used to deadlines approaching and an 11th hour extension or deal being cut,” said Art Hogan, chief market strategist at Wunderlich Securities. “The market probably anticipates something like that happening.”

Friday’s midnight deadline had Republican and Democratic leaders saying they wanted to avoid the pitfalls that shut down the government in 2013 and nearly did so in 2015. They said they had a compromise in the works, but then the White House entered the mix.

President Trump, who has threatened to shut down funding for subsidies to the ACA if Democrats didn’t agree to fund a wall, added his tweets to the debate, sending conflicting signals while also appearing to back off on his demand that money to build his wall be included in the funding legislation Congress is trying to formulate.

Rubio: Government shutdown would have "catastrophic impact"

By late Tuesday, congressional leaders hadn’t yet released the text of their spending measure. It remains to be seen whether lawmakers would opt for a short-term extension to give themselves time to pass a bigger plan to keep government agencies operating through Sept. 30, the end of fiscal 2017.

“We don’t know how this ends,” offered Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Our base case is that a short-term spending measure likely will be passed in order to prevent a shutdown, but the bigger picture of the budget process for fiscal 2018 -- starting Oct. 1 -- is anyone’s guess.”

The odds of a shutdown rise the further the issue gets kicked down the road, believes Goldman Sachs analyst Alec Phillips. “While congressional Republicans and the White House might be willing to accept lower defense spending and higher domestic spending than they would like for the remainder of the current fiscal year, they’re much less likely to accept spending bills for the fiscal year that starts Oct. 1 unless they increase defense spending and reduce nondefense spending, and fund some of the president’s other initiatives such as increased border enforcement,” Phillips wrote in a note.

Mr. Trump plans to introduce a tax plan on Wednesday, but his desire to restart health care legislation could push any tax measures into next year.  

The market, said Wunderlich’s Hogan, “doesn’t react well to a government shutdown, and it doesn’t react well a  a pro-business policy agenda getting pushed out to 2018.”