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Wall Street isn’t sweating over Washington's debt-ceiling debate
While all of Washington has been on edge for weeks over the halting debt talks, Wall Street is playing it cool.
The reason is simple.
“As a practical matter I don’t think there’s anyone on Wall Street, speaking for the financial professionals, who doesn’t believe that ultimately people who are being difficult on Capitol Hill are going to say uncle,” said Daniel Alpert of Westwood Capital.
On a recent trip to Washington, Alpert noted many in the nation’s capital talked of the debt ceiling with bated breath, sure that traders on Wall Street were ready to buy or sell massive amounts of securities based on the latest news from debt negotiations.
That’s not the case in New York.
“Everyone in New York, notwithstanding it’s 100 degrees is breathing fairly easy as long as we’re inside,” he said.
Alpert is far from alone. Tim Ryan, CEO and chairman of the Securities Industry and Financial Markets Association, says there’s a straightforward reason why markets so far haven’t been responding to the ups and downs of the debt talks.
“Because nobody thinks this is going to happen,” Ryan said of a default and downgrading of the U.S.’s AAA credit rating. “Nobody believes this will happen.”
In Washington, it can be tough to understand why New York is so sure of itself. While Wall Street is brimming with confidence that a deal will be struck, many Washington officials say the dynamics of this stalemate are different from any other they have encountered. And that means New York traders could be in for a big surprise in early August.
With less than two weeks to go before the Aug. 2 deadline, no deficit-reduction plan offered by the Senate or House has gained a significant amount of momentum. The House GOP’s “cut, cap and balance” proposal is dead on arrival in the Senate, which has yet to move its own budget.
The bipartisan Gang of Six’s proposal won some bipartisan applause, but has received a relatively cool reception in the House, where many Republicans have shown a reluctance to approve anything other than their approach, which includes the ambitious proposal of adding a balanced-budget amendment to the Constitution.
Supporters of the Gang of Six say it doesn’t have enough time to score its proposal and turn it into legislative language by Aug. 2. Critics of the Gang of Six say the plan is a glorified press release that can’t be scored because it lacks specifics.
The most difficult challenge facing negotiators remains the House.
Republicans elected in the class of 2010 say they were sent to Washington to win significant spending cuts, and they have given every indication they will not budge until satisfied. Many of these Republicans have resisted the proposal floated by Senate GOP Leader Mitch McConnell (Ky.), who has publicly worried that a failure to raise the debt ceiling could damage his party’s brand.
It is confidence in the likes of McConnell that makes Wall Street think there will be a deal.
Noting McConnell’s proposal, and conservative Sen. Tom Coburn’s (R-Okla.) endorsement of the Gang of Six proposal, Alpert said: “It’s very clear that ultimately, the adults on Capitol Hill, as opposed to the children, are going to make sure it’s taken care of.”
Democrats aren’t so sure.
House Minority Leader Nancy Pelosi (D-Calif.) predicted last week that financial markets might have to plummet before Republicans can win support for a deal.
“I don’t need to see markets drop 400 points, but Republicans may need to see markets drop 400 points,” Pelosi said at a press conference. She noted that it took another stock-market fall in 2008 to convince the House to rally behind the Troubled Asset Relief Program, the $700 billion initiative that aimed to bail out the nation’s financial institutions.
Ryan, the CEO of the securities association, said a failure to hike the debt ceiling would be a “huge mistake” that would “only increase the size of our fiscal hole.”
He said the debt-ceiling talks are becoming top-of-mind for traders and investors, and that perceived and anticipated successes or failure will affect all markets.
Tuesday’s rally was widely credited to optimism over the debt talks. After President Obama hailed the Gang of Six proposal, the Dow Jones Industrial Average closed more than 200 points higher, its biggest one-day jump this year.
Analysts say there’s no doubt the good news in Washington was a factor for the market, but it wasn’t the only reason. Wall Street is in the midst of corporate earnings season, and strong reports from Coca-Cola and IBM had already been released. After the markets closed, Apple reported another record quarter, with $7.3 billion in profits on $28.6 billion in revenues.
Despite continued worries about the global economy and the European debt crisis, people were buying. A failure to win a debt-ceiling hike would dampen that enthusiasm and strangle that confidence abruptly.
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