The debt-limit bill has passed both chambers of Congress and is now headed for President Obama’s signature. For now, it seems, the government will continue paying all of its bills. Financial markets are clearly not impressed, and U.S. equities are poised to extend losses for an eighth straight day.
At the margin, having a debt deal is clearly better than open-ended uncertainty. So why are stocks again selling off despite a resolution in Washington? First, the political acrimony that permeated the debt negotiations has left most Americans more than a little annoyed with our elected officials. And doubt in our leaders’ ability to lead generally does encourage investors to buy risk assets like stocks. Approval ratings are abysmal, and investor sentiment is similarly depressed. Second, raising the debt ceiling in and of itself doesn’t do anything. From its establishment in 1917, it has been no more than an arbitrary speed bump that forces legislators to consider the implications of borrowing more – before they simply raise the arbitrary ceiling and then borrow more. (It has been increased 74 times since 1962 and 10 times in the past decade.) Third, the spending cuts in the bill amount to much less than what is needed and they take too long to enact. And finally, leading up to today’s deadline, markets never assigned a high probability to the default scenario, so finally having a deal was not an uplifting surprise.
With sentiment already low, a string of disappointing economic figures has tipped momentum to the downside. The domestic economy, it turns out, grew slower than expected in the second quarter, and data on manufacturing and consumer spending also fell short of expectations.
Having any debt deal is good news at the margin, but markets are really good at dwelling on the negative, and plenty of concerns do remain. The dog days of summer might continue, but the underlying story is not broken. Corporate profits continue to be an unambiguous bright spot in an otherwise dreary news cycle. With a national default off the table, now is certainly not the time to panic.