Investors are no longer letting political troubles in Washington keep them from streaming money into U.S. stocks. Lawmakers show no indication of agreeing on a federal budget for the 2014 fiscal year, which may prompt more automatic spending trims in a matter of months. They face a February 7 deadline for increasing the nation’s credit ceiling. And questions remain about how the Affordable Care Act will affect what Americans pay for health care. Even so, the Standard & Poor’s 500 Index spiked up to a record last week and is up 25.6 percent so far in 2013. Uncertainty Index The correlation between the uncertainty index and year-over-year changes in stock prices shrank to 0.22 in the period from the end of the recession through October, from 0.43 for the period from January 1985 through June 2009, according to data compiled by Bloomberg. A correlation of 1 shows two groups move exactly in tandem, while zero indicates no relationship. 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. 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 December 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 February 7. 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. Yellen’s Path “Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” Fed Vice Chairman Janet Yellen, the nominee to succeed Chairman Ben S. Bernanke, said during a confirmation hearing last week. “I believe the Federal Reserve has made significant progress toward its goals, but has more work to do.” Greater Risk While Wall Street looks toward 11th-hour resolutions, some consultants in Washington warn the latest round of negotiations had greater probability of triggering a larger crisis than in the past. Normal Way Republican Congressmen “do not believe that their strategy is damaging and dangerous -- they just believe it’s the normal way of doing business,” said Fratto. “That’s why I say it’s a much more dangerous period than people really understand.” Consumers have been more concerned than investors. Twenty-six percent of respondents cited the inability of lawmakers to solve problems as the most pressing issue for Congress to consider, outweighing the combined responses for the economy and jobs, according to a George Washington University Battleground Poll conducted October 27-31. Congress’s approval rating sank to 9 percent in a survey conducted November 7-10, the lowest in the 39 years Gallup has asked the question. The pessimism about Washington may translate into a subdued outlook for consumer spending as the U.S. enters the holiday shopping season. Household purchases, which make up almost 70 percent of the economy, climbed in the third quarter at the slowest pace in two years. Rising stock prices, in turn, may mean lawmakers are under less pressure to adopt budget discipline, said Potomac Research Group’s Valliere. Congress has little incentive to reach a comprehensive deficit-reduction plan such as the Simpson-Bowles proposals drafted in 2011 without an “angry market,” he said. “That probably is a negative in terms of pushing Washington into doing the right thing, because you don’t have that catalyst,” said Valliere
