Dollars and Sense: Wall Street watching Washington

Down and downer. This week was all Washington, all the time. Almost no other news mattered. And for the most part, that meant the markets sank over concerns about the shutdown, but most especially about the debt ceiling. The Dow hit a one-month low on Monday, and then went lower still on Tuesday. The good news, I guess, is that the sell-off was not panicked, but more of an orderly retreat from equities into safer asset classes while Washington sorts things out. That said, Chicago Board Options Exchange’s Volatility Index, or VIX, widely considered the best gauge of fear in the market, spiked more than 10 percent to trade above 18 on Monday. That’s a three-month high.

Then, a turn. On Wednesday, things started looking up. But—again—it was all about Washington. The markets generally liked the news that Janet Yellen would be nominated as the Fed's next chief. Yellen is widely perceived as being more dovish on monetary policy and that means investors expect her to take a slower path towards a reduction of the Fed’s bond-buying program, or quantitative easing. By the way, if approved by the Senate, and most observers think she will be approved, Yellen would be the first woman to head the central bank in its 100-year history.

Way up. Stocks shot sharply higher Thursday, even though jobless numbers were bad—and that’s exactly my point: Yellen’s appointment, and signs that a deal to raise the debt ceiling would get done completely trumped the news that first time claims for unemployment benefits shot up drastically, to around 370,000. Now, those who study the numbers say a big part of that jump was a one-time adjustment to account for some reporting problems in previous weeks. Even so, the number was not good news, yet the markets soared, up about 2 percent, all because of what’s happening in Washington.

The week ahead. So do you think Washington and Wall Street will actually get things sorted out next week? Probably, but it might be a short term fix. It seems likely Congress will raise the debt ceiling by a small amount and for a short period of time, in exchange for spending cuts. Lots of people, and I’m one of them, think that’s a good idea. Keep Congress on a short leash, and jerk it often.

Data delayed. It should be a pretty busy week for new data, but the emphasis here is on should. Housing starts, consumer price index, and building permits are all due out this week from the government, but data flow has slowed to a trickle since the partial shutdown, so we’ll have to wait and see if these reports actually get released. But even if they don’t, we’re into the quarterly corporate earnings season again. Alcoa announced better than expected earnings last week, and so far corporate earnings news has been pretty upbeat.