Topline
Stocks plunged sharply on Thursday afternoon as Washington, D.C. lawmakers struggled to agree to spending measures that investors had been expecting for weeks. One key Democratic senator said that he would only support a huge social spending package which includes many of President Joe Biden's policy priorities, if the price tag was reduced by more than half.
In the weeks ahead, lawmakers will face a series of crucial deadlines as they try to avoid a shutdown of the government and a default on their debts. All this while Democratic leaders push for Biden's agenda. Getty Images
The Key Facts
Stocks started the day modestly up, but the Dow Jones Industrial Average fell 466 points (or 1.4%) to 33,924 at 1 p.m. ET, setting it up for its first monthly fall since June. The S&P 500 dropped 0.9% while the tech-heavy Nasdaq fell 0.3%. This puts each index at 5% below its all-time highs earlier in the month. Stocks began to fall shortly before noon on Thursday as House Speaker Nancy Pelosi (D.Calif.), reiterated her plans to vote on a $1.2 billion bipartisan infrastructure bill despite opposition from House progressives. They insist they will only support the Senate-passed bill if the Senate passes a $3.5 trillion Social Spending Package, which funds initiatives to combat climate change and increase social safety benefits. After Sen. Joe Manchin (D.W.Va.), who is critical given Democrats' one vote lead in the chamber announced that he supports reducing the bill's total price tag to $1.5 trillion, the losses got worse. Manchin also conditionally supported the Federal Reserve's unprecedented pandemic-era stimulative efforts to end their unprecedented market rally. These include historically low interest rates, monthly asset purchases of $120 million, and monthly cash injections to boost spending and inject money into the economy. The S&P lost 1.5% and 1.4% on Thursday, as industrial stocks and consumer staples, which have risen in anticipation of increased fiscal spending, led to losses.
Important Background
As they try to avoid a government shutdown and a default on their debts, lawmakers face a series of crucial deadlines over the next weeks. Meanwhile, Democratic leaders push for Biden's agenda. The Senate will vote next week on a measure to suspend debt limits for an additional year. This vote is in addition to the infrastructure vote. Janet Yellen, Treasury Secretary, warned Tuesday that a default could lead to an "economic disaster." However, Republicans insist they won't vote for the House-passed bill. Instead, Democrats should wrap the measure in a budget plan, which would be passed on a one party basis through a special reconciliation process. Schumer rejected that option on Thursday, stating that the "drawn-out, unpredictable process" was too slow and could "needlessly threaten the stability of the country."
What to Watch
Both the Senate and House are expected to pass a temporary funding measure to avoid a shutdown of government on Thursday afternoon. This will give Biden enough time to get the bill to him before current funds expire at midnight.
Tangent
Adam Crisaffuli (market analyst, Vital Knowledge Media founder) said that he is "most worried" about the "severe bout" of gridlock in Washington, which could lead lawmakers to reduce spending plans more than investors had anticipated. Crisafulli is positive that a solution to the debt ceiling will be found. However, he believes the fact that it's being used for negotiating purposes for the first time since years is a negative.
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Republicans Block Democratic Effort to Raise the Debt Ceiling, As Officials Fear Economic Catastrophe (Forbes).
Yellen warns that the Treasury will run out of cash on October 18th, causing serious harm to businesses (Forbes).
