Stock Market Plunge Indicates Investors Won’t Be Able to Handle Uncertainty Created by Government Shutdown

Yesterday’s heated exchange between President Donald Trump and top Democrats in Congress on live TV officially moved the potential shutdown of the U.S. government later this month to the forefront of concerns for investors, leap-frogging over the U.S.-China trade dispute, which seems to have softened with China preparing to announce a cut in tariffs on automobiles. The event also pushed worries over Fed monetary policy further down the list of concerns.

The proof lies in the dramatic price swings in U.S. equity markets on Tuesday with the major indexes jumping over 1-percent on the news of the potential easing of tariffs then plunging to their lows of the session during the explosive Oval Office confrontation over the funding for the president’s proposed wall along the U.S.-Mexico border and the looming deadline for a spending package to keep the government running.

The highly unusual event even rattled stock market veteran, CNBC expert and director of floor operations for UBS, Art Cashin, who said, “I have been around for not quite 80 years and I have never seen anything like this … and the stupidity to let it go on.” Cashin further added that the televised exchange increases uncertainty around the projects will move forward in a divided government. “It doesn’t look like they’ll get very much done.”

The Set-Up

What was supposed to be a “friendly” discussion between President Trump, House Minority Leader Nancy Pelosi and Senate Minority Leader Chuck Schumer over immigration and government funding, turned into a remarkable argument in front of television cameras. Stocks plunged during the exchange as the spat threatens already delicate talks to keep the government open past a December 21 deadline, when funding for seven government agencies will lapse.

According to NBC News, “Pelosi has said she will not agree to any money for a wall along the Mexican border in a Department of Homeland Security funding bill. She and Schumer planned to offer Trump a deal to pass appropriations bills for six agencies, along with a year-long measure to keep DHS funding at current levels.” Furthermore, “If Trump denied that agreement, the Democrats planned to suggest a yearlong continuing resolution for all unfunded departments.”

What Issues Triggered the Verbal Explosion

At the start of the meeting, President Trump repeatedly touted his proposed border wall. Simply stated, Trump wants $5 billion to fund the wall in a year-end spending package. The Democrats do not want to fund it. Trump repeatedly claimed the work on the wall had already started, but needs funding to finish the product.

Trump then asked Pelosi to speak. Instead of sticking with the topic, she said “the American people recognize we must keep the government open” and warned of a “Trump shutdown”. She also shifted the focus to the votes needed in Congress to fund the government. This changed the momentum of the meeting and the discussion turned into an argument.

Trump implying he doesn’t have the votes to sway Senate Democrats his way said, “No, we don’t have the votes, Nancy,” “I can’t get it passed in the House if it’s not going to pass the Senate.”

As the argument continued over votes, Schumer said:  We do not want to shut down the government.” He also said that the Republicans and Democrats will appropriate money toward border security, but not build a wall as Trump seeks.

Trump then said, “And if it’s not good security, I won’t take it,” adding you can’t have border security without a wall. Pelosi shot back, “That is not true,” citing the need for an “evidence-based” assessment of what works at the border.

After continuing to trade barbs, Trump said, “If we don’t get what we want, one way or the other, whether it’s through you, through military, through anything you want to call, I will shut down the government.”

“We disagree,” Schumer responded.

Trump then said, “I am proud to shut down the government for border security, Chuck. … I will take the mantle. I will be the one to shut it down,” the president said.

In a joint statement after the meeting, Schumer and Pelosi said, “We gave the president two options that would keep the government open. It’s his choice to accept one of those options or shut down the government.”

Market Outlook

The price action on Tuesday indicates that a government shutdown on December 21 will become a key catalyst before the end of the year. The U.S.-China trade negotiations are not expected to yield any fruit until about March 1. Next week, the Fed meets to discuss monetary policy with the market already pricing in a 25 basis point rate hike and possibly announcing a slowdown in future rate hikes.

After the Fed, investors will have to deal with the strong possibility of a government shutdown. With Trump owning the shutdown, it is likely to happen. How long it will last will be the next worry. Remember that investors don’t like uncertainty, so this event is likely to fuel a volatile reaction in the U.S. stock markets.