Decline in Stock Prices Due to Political Conflicts Over the Budget

This week, unstable trading is expected on Wall Street as it becomes increasingly unlikely that a last-minute budget agreement will be reached in Washington, raising the threat of a government shutdown, which could lead to a decline in stock prices.

The Dow Jones index fell 1.3 percent last week, to 15,258 points, while the S&P 500 index dropped 1.1 percent, to 1,691 points, marking their first decline after three weeks of continuous growth. The Nasdaq index, on the other hand, strengthened by 0.2 percent, to 3,781 points.

The decline in stock prices is a result of the irreconcilability between Republicans and Democrats regarding the budget for the upcoming fiscal year, which begins on October 1.

On Sunday, Republicans in the House of Representatives accepted a draft law on temporary funding that would finance federal operations until December 15, but also delay the implementation of the healthcare reform insisted upon by President Barack Obama for one year.

However, the Senate, where Democrats hold the majority, is likely to reject this law, while the White House has stated that the President will veto the bill if Congress approves it.

If the budget is not passed on time, many government services will cease operations starting Tuesday, which could negatively impact the markets. If an agreement is reached quickly, the markets could recover, but if the problem persists, it could adversely affect economic growth and consumer confidence.

“The shutdown of government services is like a domino. If it falls, it will trigger a series of unknowns that are difficult to quantify. The initial shock could cause the Dow Jones to drop by 200, perhaps even 1,000 points. These declines could initially be exaggerated, but if the situation is not resolved soon, it could just be the beginning,” says Adam Sarhan, director at Sarhan Capital.

However, in previous similar cases, the decline in stock prices was not so drastic, and the market quickly recovered once an agreement was reached.

Currently, however, the economy is not growing as convincingly, while stock prices have recently reached all-time highs, which opens the door for a deeper decline in the index, according to Sarhan.

On the other hand, the potential for stock price growth is quite limited. Even if a last-minute agreement on funding federal services is reached, Congress will face the next contentious debate over raising the debt ceiling from the current $16.7 trillion. If an agreement is not reached by October 17, the U.S. will be unable to meet all its financial obligations.