The Mood in Congress and the Mood in the Markets — Worlds Apart
Author: Greg Valliere
June 12, 2019
CONGRESS AND THE FINANCIAL MARKETS ARE LIVING IN TWO DIFFERENT WORLDS, which becomes apparent when we talk to members in both camps. So here’s our regular update on what we’re hearing:
THE BIG CONCERN TODAY IN CONGRESS is a budget process that’s gridlocked, so far behind schedule that the sacred August recess may get trimmed. It’s not just the foot-dragging on appropriations bills, it’s the risk of a debt ceiling meltdown in the fall and an inability to agree on spending levels in fiscal 2020. Not only are the markets oblivious to deficits, there’s concern from many investors that there won’t be enough spending to keep the economy humming.
THE TENSION IS PALPABLE among House Democrats over impeachment. Perhaps 80 of them favor beginning the process, even though a majority of Democrats agree with Nancy Pelosi that it’s futile; there’s no change in our assessment that there aren’t remotely close to 67 votes in the Senate to convict. Pelosi favors a middle ground of more hearings and subpoenas — background noise for the markets, which won’t pay attention.
THE BIG POLITICAL STORY ON CAPITOL HILL is that a sizable percentage of Republicans have finally broken from President Trump; their opposition to the Mexican tariffs prompted Trump to quickly proclaim a deal in an effort to avoid a public brawl with his own party and business leaders. The markets worry that there won’t be much progress between the U.S. and China at the G-20 summit later this month, and on this score there’s rare bipartisanship — most members of Congress favor a tough stance against Beijing.
NOWHERE IS THE DIVISION BETWEEN MARKETS AND WASHINGTON more apparent than on the 2020 election. Wall Street expects Trump to win re-election, but members of both parties aren’t so sure. The Electoral College map looks less favorable to Trump than it did in 2016, and polls this week were an eye-opener: at this early stage, Trump is clearly trailing. Fortunately for him, the Democrats have a weak field, but the election — and the Congressional abdication on Russian meddling — is about to dominate this city, if not the markets.
THE TRUMP FACTOR: The markets and the public have learned to shrug off his vitriolic tweets and outside-the-box style, but in Washington the president has a Pavlovian impact on politicians. Egged on by the cable news cacophony, lawmakers obsess over Trump, which he loves, but on this score the markets have gotten it right: ignore 80% of the dysfunction, it doesn’t affect earnings.
THE BIG ECONOMIC CONCERN ON CAPITOL HILL AND IN THE MARKETS is the ongoing feud between Trump and Jerome Powell. The Fed Chairman enjoys solid support in Congress, perhaps a little less so on Wall Street, which got blindsided by Powell late last year. In both camps there’s anxiety that if Trump needs a scapegoat, he could seek to fire Powell this coming winter if the Fed is timid on cutting rates.
THE MARKETS MAY FEAR A SOCIALIST TILT but that idea is widely derided on Capitol Hill. Elizabeth Warren’s long list of radical proposals have virtually no chance of passing in the next few years in the Senate, which could still have a narrow Republican majority after the next election. A Green New Deal is not imminent, and neither are major new taxes or any kind of radical “Medicare for All” plan that has worried investors in the health sector.
IS THERE A WILD CARD LURKING? While Congress dithers on the budget and a futile attempt to impeach, could Washington be ignoring the biggest issue of all? Ask many people in the markets what really worries them, and they reply that it’s geopolitics — new threats coming this summer from North Korea, malaise in Europe, Iran’s bold meddling in much of the Middle East through terrorist proxies, and the biggest concern of all: cyberterrorism, which should be an urgent priority in Congress — but it isn’t.
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