US lawmakers failed to agree on their spending bill for the next fiscal year, as well as raising the $16.7 trillion debt ceiling, which sent the government into a shutdown effective 12:01am EST on Monday.
Investors haven’t been turned off, as they are more than certain the US will reach a decision on raising the debt ceiling before the October 17 deadline for running out of money.
During early US trade, the Dow Jones Industrial Average climbed 0.10 percent, the S&P index, which has fallen seven of the past eight days, added 0.30 percent, and the Nasdaq Composite index gained 0.45 percent.
“The investor climate is still positive, and the US is still driving the global economy. Stability looks solid, we don’t expect any big volatility from this political dispute,” Vladimir Potapov, head of Moscow-based VTB Capital, told RT.
“We’ve seen this more than 20 times in the U.S, and remember, they still have time to resolve the default issue,” said Potapov.
The US shutdown has had little effect on foreign markets. European stock markets were mostly higher on Tuesday, despite the shaky political news from America.
Equities could actually stand to gain following the shutdown, according to Bloomberg, who reported the S&P 500 has on average risen 11 percent the year after a government shutdown, higher than the average gain. The data is based on the 12 shutdowns that have occurred since 1976.
The S&P 500 has risen 11 percent on average in the 12 months following a government shutdown, according to data compiled by Bloomberg on the 12 instances since 1976. The S&P is already at a relative peak after it gained 3 percent when the Federal Reserve decided to continue its $85 billion-per-month bond buying program.
“The economy we have today can be described as an economy of sentiment, driven mostly by market expectation. All of the crisis are hand-made today,” Igor Nikolaev, director of the strategic analysis department at PKF, told RT.
The current investment sentiment is much more dependent on long-term economic factors, which are still very strong in the US. Investors have confirmed preference of developed markets to emerging markets.
“TV networks all over the world will talk about it. But the people who are buying and selling dollars will not pay too much attention,” said Jim Rogers, chairman of Singapore-based Rogers Holdings, adding it’s more of a political show than economic reality.
“They’re not on the brink of default because they can print as much money as they want. Yes, America’s the largest debtor-nation in the entire history of the world. Nobody’s ever been this deep in debt and it’s going higher and higher,” he said.
Some analysts are more optimistic about the shutdown, hoping it will help speed along the decision to raise the debt ceiling.
Alec Phillips, a Goldman Sachs economist, said on Friday that a shutdown could “ease passage of a debt-limit increase” as Republicans will lose their influence in Congress as they are largely blamed for pushing the shutdown
Politicians, who are fighting to gain support in the budget battle, are telling a much more dramatic doomsday tale.
“We know it would have a profound destabilizing effect on the entire economy — on the world economy — because America is the bedrock of world investment,” President Obama said on Friday in a warning to Congress, adding Congress shouldn’t ‘fool’ with the world’s reserve currency and the foundation for capital markets.
Reprinted with permission from Russia Today.