Now that politicians have decided a shutdown is worth doing, we think the big question for investors is what it will take to convince them that it is a bad idea. The risk is particularly high given that neither side budged an inch in the negotiations: House Republicans repeatedly passed resolutions; Senate Democrats responded with repeated “clean” continuing resolutions. Moreover, the rhetoric suggests that both sides embraced a shutdown.
Inside the beltway this may look like a “zero-sum game” where one party’s win is the other party’s loss. However, outside the beltway, we believe this is very much a negative- sum game: the odds of a major shock to the economy and a full-blown correction to the stock market have risen. Ironically, we think this also puts upside risk to the budget deficit – due to shutdown costs and reduced revenues – and it does not slow implementation of the Affordable Care Act – it is funded outside of the appropriations process.
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