Record S&P shows investors unfazed by U.S. gridlock

Incentive Structure

Gapen said “markets had confidence in the incentive structure that was in place” during October negotiations that produced an agreement to end the government shutdown and a suspension of the federal debt limit to prevent a default.

So far, the economy shows few signs of being damaged by Washington’s brinkmanship. Gross domestic product climbed more than projected in the third quarter heading into the budget impasse, and the 204,000 gain in October payrolls surpassed all forecasts of economists surveyed by Bloomberg.

“It feels like the economy is growing, albeit not great, but we’re moving forward despite the best efforts of our elected officials to hold us back,” said Walter Todd, chief investment officer at Greenwood Capital Associates LLC in Greenwood, South Carolina, who helps manage $950 million.

Todd said he believes lawmakers will reach agreement on a “smaller-scale” deal to get the U.S. past the next budget hurdles. “It still doesn’t address the structural issues, and that is a longer-term concern, but as far as the next several months go, I think we get through that relatively OK.”

Next Test

The next test of market resiliency in the face of political turmoil is weeks away. Congress’s self-imposed deadline to agree on a fiscal 2014 budget is Dec. 13. The law now funding the government expires Jan. 15, and failure to reach agreement would mean more across-the-board spending cuts under sequestration. Finally, the suspension of the debt ceiling expires Feb. 7.

Stock market performance shows how investors have become desensitized to heated political debates. In the two weeks ended Oct. 17, when Obama signed the latest budget deal, the S&P 500 Index climbed 3.2%. That contrasts with a 16.3% decline in the two weeks ended Aug. 8, 2011, which included an agreement to avoid a default on the debt and a subsequent downgrade in the U.S. credit rating by S&P.

In today’s trading, the S&P 500 Index was little changed at 1791.36 as of 3:18 p.m. in New York.

Fed’s Support

The Federal Reserve’s unprecedented monetary support is a major reason the market reaction was different this time around, said Greg Valliere, chief political strategist at Potomac Research Group in Washington.

“The biggest difference was the clear expectation of the Federal Reserve making up the difference, becoming even more accommodating,” said Valliere.

In August 2011, the Fed pledged for the first time to keep its benchmark interest rate at a record low, at least through the middle of 2013, in a bid to boost the recovery. Now, the Fed pledges to retain that policy at least as long as unemployment remains above 6.5 percent, and has added an open-ended commitment to continue monthly asset purchases to support the economy until the job market has improved “substantially.”

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