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U.S. stocks rebounded Tuesday from Monday' s selloff, seemingly to be unmoved by what is the first partial U.S. government shutdown in 17 years.
Although the shutdown was within expectations of most analysts and experts, the mild rally of stocks still surprised them a little bit. They think it does not make a lot of sense when the government shutdown has just started.
Analysts noted that the rally could be short-lived, as the looming debt ceiling deadline on Oct. 17 will post a bigger problem to the market.
Government shutdown no big deal
The White House Office of Management and Budget late Monday night ordered the federal agencies to begin their plans for the government shutdown, due to a lack of bipartisan funding bill.
There have been 17 partial shutdowns of the federal government agencies since 1977, according to the Congressional Research Service. Among these shutdowns, the longest being the one from late 1995 to early 1996, which lasted 21 days, but most of them were quite brief.
Alan Valdes, director of floor operations at DME Securities, said Tuesday that the government shutdown"is really not that a big deal."
"It sounds like the end of the world, but if you really step back and look at it, it does affect 800,000 jobs, which is a lot of people, there is no question about it... but it' s mainly in libraries, national parks, museums, things of that nature. So initially if this shutdown only lasts a week or even two weeks it' s not really going to affect the economy,"Valdes told Xinhua.
Mark Newton, chief technical analyst at Greywolf Execution Partners Inc., said although government shutdown in the last 25 year hasn' t really been all that meaningful for stocks, but"a longer shutdown and inability to come together might have more bearish consequences for the overall market."
Newton said investors are more frustrated than worried at this point because the Republicans and the Democrats"really don' t seem to have the public' s best in their mind."
Economists from Bank of America Merrill Lynch estimated that"a couple of days shutdown would likely have zero net impact upon growth; a two-week shutdown could shave 0.5 percentage point, while a one-month shutdown could lop 2 percentage point from the fourth-quarter growth."
"There may be additional knock-on effects through confidence and on into consumer spending which are harder to quantify, though in the last shutdown in 1995-1996 these appear to have been minimal,"Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said Tuesday in a note.
Shutdown may delay Fed taper
Traders attributed the stocks rally to investors'belief that the U.S. Federal Reserve may delay the tapering of its bond purchases program."It' s bad news for the economy, good news for the market,"Valdes said.
Gregory J. Keating, managing director at James E. Coffey Securities Inc, said:"I think the bad news becomes good news in this case, where the government being shutdown makes the market think that the Fed tapering is going to be pushed off even further,"
"I think the consensus is it (tapering) was not going to be at the next meeting, but most likely in December. Now maybe that could be pushed off to the next year,"Keating told Xinhua.
Moreover, the market was also supported by capital inflows typically seen at the start of a new month and a new quarter.
Newton said he was a bit surprised by Tuesday' s rally."Looking back historically, when you have government shutdown, that causes big volatility and almost always to the downside. It' s never viewed as positive news,"he said. It's tough to think the rally is sustainable, he added.
"The market today is responding more to the beginning of month seasonality and (capital) inflows than cheering the government shutdown, which is obviously not why the market is rallying,"Newton said.
Debt limit woes weigh on rally
In the wake of the government shutdown, traders expressed more concerns about the looming debt ceiling deadline on Oct. 17, but most of them agreed Washington will not default on its debt.
"If they would have default on the debt, that will have a very big deal on the market,"Newton said, adding"the (debt ceiling) issue and the debate concerning that is also going to be something that might continue to spook stocks."
For Keating, the government shutdown is a"harbinger." "By happening, I think that is kind of a hint at what could happen in mid-October,"he said, noting that failure to raise the debt limit is going to be"a major setback"to the markets.
Keating said the debt ceiling issue becomes more serious now because"you' ve seen a continuation of the old cliche -- kicking the can down the road."
"They are not going to find a solution. It' s too complicated for that. But I think they are going to find some sort of progress and happy medium between cutting expenses and raising revenue,"he added.
From a technical stand point, Newton predicted that the stock market still have weakness between now and early November, and will probably make some sort of a rally into the year end; and next year there will be a bigger chance of turning to the downside.
Echoing Newton' s view, Keating said"there are more headwinds ahead of us."Although he does not see a large correction,"the momentum of the market is going to run out."
On a long-term basis, Newton said he is bullish and would use any pullback into 2016 to buy stocks for the long run.
"Still, this is really the heart of capitalism. You still see a lot of money coming to the United States. It' s still the safest place to be. I think they will get over the debt ceiling,"Valdes said.
Year to date, the blue-chip Dow Jones Industrial Average is up almost 16 percent, while the benchmark S&P 500 is up nearly 19 percent. And the tech-heavy Nasdaq has posted an impressive 26-percent gain so far.
