The Budget Debate Intensifies in Washington

After three consecutive weeks of rising stock prices, cautious trading is expected on Wall Street this week as the debate between Democrats and Republicans over the budget and the increase of the federal government’s borrowing limit intensifies in Washington.

The Dow Jones index strengthened by 0.6 percent last week, reaching 15,451 points, while the S&P 500 rose by 1.3 percent to 1,709 points, and the Nasdaq index increased by 1.4 percent to 3,774 points.

The rise in stock prices was fueled by the unexpected decision of the U.S. central bank to keep its programs for purchasing government and mortgage-backed securities, worth $85 billion per month, unchanged.

As a reduction of these programs by $10 billion per month was anticipated, the Fed’s decision sparked euphoria in the market last Wednesday, leading the Dow Jones and S&P 500 indices to reach all-time highs. However, investor enthusiasm was short-lived, and stock prices fell in the last two days of last week.

The focus of investors now shifts to the U.S. budget debate, which will have two distinct but related deadlines. An agreement on the budget is expected to be reached by the end of this month, while the federal government’s borrowing limit should be increased by mid-October to ensure the state can meet all its obligations.

Until an agreement is reached, uncertainty may prevail in the market, given that a similar situation occurred in 2011 when Republicans and Democrats could not agree on the borrowing limit in time, resulting in the U.S. losing its top-tier AAA credit rating for the first time in history, which triggered a sharp correction in stock prices.

 - Reflecting on 2011, Republicans may conclude that if no agreement is reached on increasing the borrowing limit, they could be blamed in the public eye. Therefore, they will be very sensitive to public opinion, says Brian Jackobsen, a strategist at Wells Fargo Funds Management.

Although cautious trading is expected, as surprises are always possible, most analysts believe that the scenario from 2011 will not repeat itself.

 - Despite the heated rhetoric from Republicans and Democrats, I believe they will reach an agreement, and then the market will continue to rise, says Stephen Massocca, a director at Wedbush Equity Management.