Now that Senate Majority Leader Harry Reid and House Speaker John Boehner have decided to agree to disagree Congress will apparently move forward and approve the bill extending the debt limit and opening the government back up for business. The outcome of these now ritualistic events are the worst kept secret since Luke discovered who his father was. It's Darth Vader, if you didn't know. This is how our government functions (or does not function, depending on your perspective) now. The rancor has reached epic proportions, when you consider the seriousness of the impact if the parties involved were actually serious about anything. Would either party let the US Government not only shutdown but more importantly default on it's worldwide obligations? It really is hard to fathom despite our lowly opinion of the folks that we elected to legislate on our behalf.
How Did They Agree To Disagree?
They really did not agree on much. The agreement is all of a continuing resolution to keep things status quo until December when we will revisit this all over again. The debt limit has been extended until February 7, 2014 at which time it will need to be extended again. So this is really more can kicking than agreeing.
Whither The Markets?
Despite general annoyance at what goes on in Washington DC most folks only care about the impact any of these machinations have on the bond and equity markets, both of which impact their wallets. Equities will rally, at least initially. It is important to point out that equity markets never really faltered throughout this ordeal and are nearly as high as they've ever been and in the case of the small cap Russell 2000, they are at record highs. So where do we realistically go from these levels? Most likely higher. Markets don't tend to change trend until they do and until then they generally continue to follow suit. "It's a bull market until it isn't." This is a popular market refrain. As long as the Fed continues to inject it's stimulus in to the market through it's quantitative easing the market should continue to see gains. When the stimulus ends the market gains will end. Until then, pour another drink.
The bond market is a different animal than the equity markets. It is the "rational" of the two. Whereas the equity markets tend to be more emotion driven, the bond market takes a more sober tack. Given the Fed's QE (quantitative easing) it is not likely that yields can or will climb too high. Again, once the tapering does begin, yields probably will climb. However, unless the Fed increases the stimulus it is unlikely yields and therefore mortgage rates will fall back to their historic lows. If you procrastinated on that refinance four months ago, might be wise to get up on in there and get it done. It will probably take something none of us want to see for the Fed to start injecting that much additional stimulus.
What Have We Learned From All Of This?
Well, it's safe to say that the markets have learned to almost completely disregard what goes on in Washington except when it pertains to stimulus. The absence of any significant sell off in either market reflects this disregard. It's mostly the media that makes any kind of hullaballoo about the goings on in the nation's capital. With a couple months respite from thinking about budgets and debt limits consumers can go back to the malls, the analysts and money managers can go back to trying to figure them out and the media can pick up on the next big story, maybe Syria makes it's way back on to the front page.
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