Blog : Fed Deal Reaction Underwhelming

by Ed Zwirn on October 17th, 2013

The stock market opened on the downside this morning, as investors digested the details of the last-minute congressional deal struck late Wednesday night that ended the debt ceiling extension and government shutdown "crises" that had bedeviled worldwide financial markets.

Overnight trading in stock futures had shown the Dow Jones Industrial Average falling over 100 points in the aftermath of the deal, which to nobody's surprise was signed into law by the president around midnight, just ahead of the date set by the Treasury for expiration of the federal government's borrowing authority. This futures prediction played out this morning, with the DJIA tanking in opening trading and still down over 88 points as of this writing.

The market's underwhelming reaction to the news of the deal is understandable because the news and its timing was widely anticipated, and therefore priced into investor expectations. In addition, as has been widely noted, the deal only postpones the day of reckoning for the U.S. financial and political systems, extending the government's ability to operate until January and its ability to borrow to finance these operations until February.

Looking ahead, investors in everything from penny stocks to blue chips can look forward to the deluge of economic data which would have come out had the government been allowed to do its job for the past 16 days: Although nobody is predicting any great upward movement on the jobs front, the fact remains that we haven't had an official update on employment since Sept. 6. We've also missed numbers on consumer and producer prices, construction spending and retail sales.

Looking a bit farther ahead, the U.S. Federal Reserve Bank will likely be hamstrung by the continuing crisis atmosphere in Washington, with little prospect that it will announce any "tapering" of its $85 billion monthly bond buying program, at least through Jan. 29, the date of the year's first Fed announcement. With this pivotal announcement coming just about a week ahead of the next scheduled debt ceiling "crisis," the Fed is not likely to risk depressing financial markets by announcing any cutbacks to this program, which has largely fueled this year's market rally.

This leaves the fun stuff to Janet Yellen, who has been nominated to succeed Ben Bernanke at the helm of the Fed when his term expires in January. Although it is widely expected that a tapering will begin at some point in H1 2014, speculation about the specific timing of this tapering will continue to dominate the market throughout the interval between now and then, with the market continuing to benefit - at least during periods between U.S. political debacles.