It seems unlikely the Senate will vote to kill the Affordable Care Act this week, even though the Republicans in charge have been promising to do that for seven years. But if a repeal bill does squeak through, investors will have a new worry to factor in.
If the Senate does vote to repeal Obamacare, the legislation will be different from a bill the House passed in May. That means the two chambers will spend additional weeks or months hammering out a single bill able to pass in both houses. Those combative negotiations could derail progress on two pieces of must-do legislation that directly affect markets: one to increase the federal borrowing limit and another to establish federal spending priorities once the current fiscal year ends on Sept. 30.
Both of those matters are likely to be contentious, under the best circumstances. A prolonged smackdown over repealing the ACA could threaten the bipartisan cooperation needed on both matters. “If the debate over health care spills over into September, this could further complicate an already difficult set of fiscal deadlines,” Goldman Sachs warned in a recent note to clients, “potentially raising the probability of a federal government shutdown and raising the risk that Congress cuts it extremely close in raising the debt limit.”
Everybody understands that Congressional showdowns are largely theatrical, with legislators voting to avert disaster at the last possible moment. But markets hate the drama, anyway.
During the last shutdown, in October 2013, the S&P 500 index sold off nearly 4% before Congress got its act together and the government reopened. Brinkmanship over the debt ceiling is generally more worrisome, because it threatens the creditworthiness of Treasury securities. When Congress delayed raising the debt ceiling until the last moment in 2011, the S&P plunged 17% and didn’t fully recover for more than six months. Amid the crisis, Standard & Poor’s cut the US credit rating by one notch, for the first time ever, citing political dysfunction. The rating has never gone back up.
What about tax cuts?
Washington will muddle through, but debilitating political battles over basic government functions will endanger another matter important to markets—the tax cuts President Trump has promised. Trump recently reiterated his pledge to cut the top corporate rate from 35% to 15%, and offer middle-class workers some tax relief as well. The legislation needed to make that happen can only come after Congress deals with the budget and debt ceiling—and settles Obamacare.
The House begins a five-week recess on July 28, with the Senate to follow a few days later. The agenda will be crammed when legislators return to Washington in early September. And investors may tune out the drama until then. “Time is running out,” Greg Valliere of Horizon Investments wrote in a recent newsletter. “We still don’t think Washington can really annoy the markets until fall at the earliest, when it will become clear that budget issues are just as difficult as Obamacare repeal.”
Former Federal Reserve Chairman Ben Bernanke said at a conference in May, “It always puzzles me a little bit that markets are very blasé about political risk until the last moment.” That could be the case this summer. Investors want to feel upbeat, until Washington brings them down.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman