US political dysfunction weighs on investor minds

A US government shutdown appears increasingly likely next month following the ousting of Kevin McCarthy as speaker of the house of representatives. US political dysfunction looks increasingly acute, but do investors care?

Opinion is divided. JPMorgan recently noted US stocks have been about flat on average during past shutdowns. Similarly, many strategists note professional investors are much more focused on monetary policy and economic developments than on Washington politics, which 22V Research’s Kim Wallace describes as no more than an “avocational curiosity”.

UBS economist Paul Donovan says markets are “not surprised that members of the US Congress are incapable of doing anything”.

Nevertheless, Donovan is not sanguine, saying replacing McCarthy with someone closer to the far right would reduce “any lingering hopes of bipartisanship”. Many other analysts have cautioned that political wrangling could result in negative economic implications.

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Indeed, Cumberland Advisors’ David Kotok recently warned political instability has already affected markets, citing widening credit spreads on various types of financing.

“Anyone who thinks that political dysfunction doesn’t have a cost”, said Kotok, “is ignoring the facts.”

Others might argue politics played little part in the recent deterioration in financial conditions. Still, it’s hard to disagree with the assessment of billionaire money manager Howard Marks. “It’s clearly worrisome”, says Marks. “This business about using a default as a negotiating tool is very, very dangerous.”