Will Congress Crash the Market in 2014?

Source: The Associated Press.

At times it has seemed as though Congress has been deliberately trying to sabotage our economy over the past two years. First, there was the debt-ceiling debacle of 2011, which resulted in a downgrade of the U.S. credit rating by S&P for the first time in our history. Then there was the fiscal cliff and sequestration shenanigans at the end of 2012 and beginning of 2013. More recently, we experienced the government shutdown, and yet another debt-ceiling crisis last month.

These periodic attempts at political seppuku, alas, are not without costs to our economy and markets. In 2011, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) plummeted by 634 points on the first day of trading after the downgrade, and the index lost 400 points in the midst of the fiscal cliff crisis in December 2012. In addition, the recent government shutdown may have cost taxpayers as much as $2 billion in lost productivity, according to the White House budget office. We may have even been minutes away from another downgrade by S&P, according to a report by Newsweek.

What'll they do for an encore?
Perhaps unsurprisingly, legislative dysfunction has caused Congress' approval rating to hit an all-time low of just 9%, according to a recent Gallup poll. Even hipsters, of all things, are more popular than Congress right now.

One would think that Congress might be sufficiently chastened, at this point, by the widespread criticism of their recurring brinkmanship on crucial issues facing our economy. Should we hope for a change of tack by Congress in 2014, or will it be more of the same? And what will all of this mean for markets and investors?

Let's first consider where things stand right now, in November 2013. The recent deal approved by both the Senate and the House of Representatives funds the government through mid-January and suspends the debt ceiling until Feb. 7. Meanwhile, a bipartisan committee from both chambers has already begun negotiations with the hopes of avoiding another crisis.

There's one additional detail that investors should be aware of as we approach the reinstatement of the debt ceiling on Feb. 7. According to Bloomberg, the Treasury Department should be able to stay under the ceiling for about a month or so after the deadline. This could possibly push the debate over the debt ceiling closer to congressional midterm elections. Now, we're not political scientists, but we can imagine that impending elections might make politicians even less likely than usual to compromise on issues like spending and taxes.

What does it all mean for the market?
The key for investors is to look at incentives for House Republicans. It's possible the party will decide it's not in their best interest to prompt another fight over the debt ceiling in 2014. The Republican Party's approval rating sank to the lowest recorded level of any party in the United States during the 2013 government shutdown and debt-ceiling crisis. In polling, roughly three-quarters of the public disapproved of their position to shut down the government over Obamacare. Perhaps, one might think, with midterm elections coming up, they'll be more risk-averse.

But that way of looking at the question would have predicted things wouldn't have gotten as far out of hand last year, too. Although the crisis may have been bad for the party as a whole, many House Republicans felt more pressure to fight to shut down the government and risk a debt-ceiling breach than to fight to end the standoff, since they represent very conservative districts and fear Tea Party challengers more than they do Democratic candidates. Unless business groups are able to credibly threaten those incumbent Republicans whose position on the debt ceiling risks the U.S. Treasury's full faith and credit, the approaching midterms don't change their incentives -- they might actually exacerbate them.

What can we do?
If another fight over the debt ceiling heats up in 2014, traders will be parsing the every twist and turn of the negotiations to try to profit from market fluctuations.

But long-term investors shouldn't bother. In the unlikely event Congress doesn't raise the debt ceiling, causing the government to default on its bills and precipitating a financial crisis and massive recession, we'll have bigger things to worry about than the value of our stock portfolios. And if Congress does raise the debt ceiling, then any attempt to profit by betting on short-term market moves is just market timing.

For investors, analyzing what to invest in is almost always a better use of our time than trying to read the market tea leaves to figure out when to invest.

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Read/Post Comments (9) | Recommend This Article (13)

Comments from our Foolish Readers

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  • Report this Comment On November 17, 2013, at 12:20 PM, mr091468 wrote:

    536 DC prostitutes have ruined this country of 320 million. Time for a revolution. This bankrupted thing is broken.

  • Report this Comment On November 17, 2013, at 3:15 PM, Frank wrote:

    Do you really think these POLICTIONS care about us citizen's. They should have ther'er pay CUT And they should get PAID as they do the JOB. The freeze on pay for 16 days cost BILLIONS of $$$$$$. They really are mi=ore ci=oncern about themself. Good LUCK America.

  • Report this Comment On November 17, 2013, at 4:51 PM, comosichiam wrote:

    This is a typical liberal ploy implying that congress can or would make the market crash. For your information if it wasn't for the fed propping it up with endless bond buys it would have crashed a long time ago the market on it's best day is a tragic illusion that will soon sink into the abyss.

  • Report this Comment On November 18, 2013, at 9:18 AM, rwhprism wrote:

    I thought Obama was going to negotiate spending cuts after he got his debt limit increase. Are you saying he didn't cut enough to avoid another disaster? Did he cut agree to any cuts? Has he even negotiated or is this going to be another crisis?

  • Report this Comment On November 29, 2013, at 6:53 PM, cmalek wrote:

    We are truly a nation of sheeple. We keep re-electing the same people over and over and over again, no matter what they do to us and our country. We, the people, had the chance and the power earlier this month to stop all of this by putting the Congesscritters on the unemployment line. DId we grab the chance and exrcise our power? No, we meekly re-elected the same miscreants. Albert Einstein defined Insanity as doing the same thing over and over and over again, and expecting different results. When are we going to regain our sanity?!

  • Report this Comment On November 29, 2013, at 7:05 PM, nwhunter wrote:

    The picture of Larry, Curly and Moe at the top says it all.

  • Report this Comment On November 29, 2013, at 11:13 PM, enginear wrote:

    This two party system we're trapped in is a part of the problem. The elections of republican against democrat are easy; the politicians draw up the districts so that the ruling party incumbents have nothing to fear, but in primaries the most shrill and explosive candidate wins (TEA party or ultra left, depending on the district and timing).

    As we all get fed up and 'vote the scoundrels out', more and more inexperienced radicals line up on either side of the aisle in Washington, and guess what happens?... Gridlock.

    Boehner and Reid have to try to herd a bunch of unruly children around, and it ain't easy to compromise under such circumstances.

    As Pogo Possum said years ago, "We has met the enemy, and he is us!" (or was it his cigar chomping alligator friend... named??).

  • Report this Comment On November 30, 2013, at 1:07 AM, Maximilian2 wrote:

    I am sorry, markets be damned. I have 5, count them 5 nieces and nephews!

    I want to hand them a country in as good a shape or better then I got it. I am all for those in congress working at (even if by force) bringing Washington D.C. under monetary control.

    Be it Bush wasteing our money in Iraq (Afganistan is still a justified war. Remember 9/11?)

    Or Obama wasteing more money then all other presidents combined.....

    SOMETHING HAS TO HAPPEN! If not now.....when?

  • Report this Comment On December 10, 2013, at 12:43 PM, ncgolfer03 wrote:

    the system is broken because the pols have made a career of being a pol. They try to do too much and fail most of the time trying to make their mark on the country. If they would just stop trying to do so much at the federal level, the states and citizens would be a lot better off. Their pay should be cut to eliminate the career pol and all laws should have a sunset clause so bad laws have a chance to roll off the books eventually.

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