Is Wall Street Used to Instability in U.S. Politics?

Stocks are back where they started prior to shutdown.

President Barack Obama is seen on a TV screen on the floor of the New York Stock Exchange Thursday, Oct. 17, 2013.
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Stocks ticked higher on Thursday the morning after President Barack Obama signed a law reopening the government, which left stocks roughly where they were prior to the shutdown. This lack of dramatic change indicates Wall Street might be used to the Washington's ongoing brinksmanship.

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The Dow Jones Industrial Average dropped 0.37 percent to 15,317 as of 2:00 p.m. EDT, while the S&P 500 edged 0.36 percent higher to 1727, and the Nasdaq Composite Index increased 0.33 percent to 3852.

Poor earnings reports from International Business Machines, eBay Inc. and Goldman Sachs dragged stocks following the enactment of an 11th-hour deal from Congress to fund the government through Jan. 15, and raise the debt ceiling until Feb. 7. A group of lawmakers has until mid-December to negotiate a long-term spending plan.

Congress has kicked the can down the road on the debt ceiling, but another bruiser over the debt ceiling in the coming months is unlikely because the 2014 midterm elections are approaching, says Joseph Lupton, a global economist at JPMorgan Chase investment firm. Meanwhile Wall Street appears to have gotten used to "governance by crisis" since the last time the U.S. came close to a default on its debt in 2011, as this time there was a general sense that an 11th-hour deal would avoid a default, Lupton says.

"I think to the extent that there was never a big sell-off in response to the shutdown you should not expect much of a rally," Lupton says. "The focus of investors is going to shift back to what is going on in the economy, and it's going to be made possible by the fact we are going to get data from the government again."

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Stocks climbed in September following a decision by the Federal Reserve on Sept. 18 not to cut back on its bond buying program, a process also dubbed "tapering." The shutdown ended that rally but stocks have rebounded, says Paul Edelstein, director of financial economics at IHS Global Insight.

"In the few past days stocks have kind of resumed to just after that Fed meeting when the Fed decided not to taper," Edelstein says. "We have kind of recovered ground because a deal was in place. I think the market has already priced in the response to the deal."

Markets dropped more dramatically in 2011 to the U.S. debt crisis than they had during the recent government shutdown, which indicates markets have adapted to instability in U.S. politics, Edelstein says. Investors in 2011 were also fearful of the debt crisis in the European Union two years ago, so that contributed to a decrease in stocks that year and makes it more difficult to compare market behavior, Edelstein cautions.

"I still think political brinksmanship is not welcome by the markets and they are going to price that in," Edelstein says.

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