No jitters yet on Wall Street as deficit talks veer off course

Wall Street is keeping an even keel as policymakers appear ready to veer off the fiscal cliff and allow billions in spending cuts and tax hikes economists warn could trigger a recession.

Investors have become used to eleventh-hour standoffs over such issues, sources said, after seeing similar stories play out over the last few years against backdrops of government shutdowns and eclipses of the debt ceiling.

“The markets seem to be taking this in stride and just thinking this is the normal political theatrics,” said Michael Feroli, chief U.S. economist at JPMorgan. “I don’t think anyone’s too concerned.”

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While there is frustration that Speaker John Boehner (R-Ohio) and President Obama appeared to be nearing a large deficit deal only for talks to fall apart, there is still hope the sides can reach a deal before markets panic.

“Every deal blows up at least three times before coming together,” said Scott Talbott, senior vice president for public policy at the Financial Services Roundtable. “Complicated negotiations are always three steps forward and two steps back.”

“Washington’s got a great tradition of sending people home for Christmas and then, somehow, magical things happen,” said Daniel Alpert, managing partner at Westwood Capital. “When you’re only dealing with one issue, there’s plenty of time to get it done.”

Stocks on Thursday reflected that lingering optimism. Even as administration officials and aides to Boehner bickered, the Dow Jones Industrial Average closed up 60 points on the day. The Nasdaq and S&P 500 both also closed higher.

Markets closed higher despite the fact that there was no sign Thursday that either side was coming closer to striking an agreement. House Republican leaders spent the day working to win over enough members of their party to pass Boehner’s tax “Plan B.” 

Meanwhile, Senate Democrats vowed the bill would receive zero attention in the chamber, adding to Wednesday’s veto threat from the White House.

Senate Majority Leader Harry Reid (D-Nev.) dismissed the efforts as “pointless political stunts,” accusing Boehner of wasting valuable time.

“The bill has no future; if they don’t know it now, tell them what I said,” he added.

Meanwhile, White House officials claimed that Boehner began pushing “Plan B” because he could not garner sufficient support for his own offer to Obama.

A spokesman for Boehner dismissed the claim, from a senior administration official, as “stupid and untrue.”

Last Friday, Boehner pitched Obama $1 trillion in new tax revenues, up from $800 billion in his initial proposal. That included an increase back to Clinton-era tax levels for those making over $1 million per year, in addition to closing deductions and loopholes. He also asked Obama to accept $1 trillion in spending cuts and reforms to entitlement programs, but was willing to raise the debt ceiling.

The president rejected Boehner’s proposal, and countered with an offer that would have raised $1.2 trillion in new revenues from an increase in tax rates on those making more than $400,000 per year. Obama wanted a two-year hike to the debt ceiling, but in a concession to Boehner offered to change the way inflation is calculated on government programs, including Social Security.

Despite the bickering and drama with time dwindling, investors are keeping their powder dry. Underpinning that resolve is an element of world-weariness and cynicism brought on by prior rounds of fiscal fights in the 112th Congress.

“We kind of suspected it would be a messy process, and so far it’s pretty messy,” Feroli said. “People are frustrated with it, but at the same time, they seem to realize that’s the new reality.”

That patience, however, is not endless, and markets will not wait around much longer for Washington to begin showing signs of progress.

FitchRatings warned Wednesday that the nation’s AAA rating would be in danger if Washington faced a “prolonged” standoff on the fiscal cliff and debt limit in 2013. A downgrade could set off market turmoil similar to what was suffered when Standard & Poor’s issued the first-ever downgrade of the nation’s credit rating following the debt-limit battle.

Sources agreed that if Jan. 1 rolls around and the two sides do not look to be close to an agreement, markets will finally react as investors prepare for the economic hit that will come from going over the cliff.

“The market will react very negatively if we go over the cliff,” Talbott said. “The last trading days of the year will see a large drop if the ink isn’t drying on a deal.”

The market could nosedive if the U.S. enters 2013 with fiscal-cliff policies in place, but Alpert contended that any panic could be easily addressed in the first days of the 113th Congress, when lawmakers could take an easier vote on cutting the just-hiked rates.

“I think the business intelligentsia believes that there’s a reasonable chance that we actually go past New Year’s and everybody shows up in the new Congress and votes for tax cuts,” he said. “The markets will panic for a period of time, and it won’t matter for a whole hill of beans because we’ll have another deal in a couple weeks.”