Investors to Washington: You're confusing us

Crude truth behind oil's global boom
Crude truth behind oil's global boom

Investors like clarity, and Washington hasn't been serving up a lot of it.

The Federal Reserve has kept everyone guessing when it will start raising interest rates. It wasn't September, as many expected? Maybe in October? Maybe in December?

And some in Congress have been threatening a return to their reckless ways by forcing a government shutdown.

There is good news: House Speaker John Boehner's surprise announcement Friday that he will step down at the end of October greatly lowers the chances of a shutdown.

Insiders had placed the odds of a shutdown at about 50% -- or higher. Now that's dropped to under 30%, says Greg Valliere, chief political strategist at Potomac Research. The expectation is Congress will pass a bill to avert a shutdown as a "going away present" for Boehner.

So that's one less issue for investors to worry about ... for now.

Here's the bad news: The shutdown and a possible debt ceiling showdown will likely be back in December.

"The chances of a serious crisis in December have actually increased," says Valliere.

And there's no telling how a new Republican leader in the House -- untested by the recurrent fiscal fusses of recent years -- would react.

A more conservative Republican leader such as Kevin McCarthy, the current No. 2, might be ready to fight. The far right wants to end all government funding for Planned Parenthood. The White House says no way.

Related: American companies are hoarding $1.4 trillion in cash

Would the Fed raise rates during a government crisis?

The political shakeup adds to the list of question marks for investors -- not only the Fed, but China's slowdown and extremely low oil prices.

The stock market has been on a queasy ride since late August when the Dow plunged 1,000 points. Investors have been "dazed and confused" ever since. None of the rallies have lasted. Not only is the Dow in correction mode, but it's also back to levels not seen since March 2014.

"Would [Janet Yellen] dare to raise rates during a crisis?" wonders Valliere.

In one scenario for avoiding a shutdown this week, Congress passes a short-term spending bill before the new fiscal year begins Thursday. That could postpone the mess until probably December -- around the time lawmakers might need to raise or suspend the debt ceiling.

The Fed is set to meet on December 15-16.

Related: Janet Yellen says rate hike still likely in 2015

Shutdowns have little economic impact

Shutdowns aren't actually that harmful to the economy or stock market. They have occurred a dozen times before, most recently in October 2013 when the government closed for 16 days until Congress and the White House reached a budget agreement.

That shutdown cost $24 billion. It's not nothing, but it's pretty small in the context of America's $18 trillion economy.

As for the stock market, it saw a very short-lived dip of 4% when the last shutdown began.

"It quickly became clear that this would be a relatively benign affair and a solution would quickly be found," wrote Dan Greenhaus, chief strategist at BTIG. The same would likely happen again.

Related: 7 things you need to know about the debt ceiling

The debt ceiling would be the real scare

The bigger issue for Wall Street is the debt ceiling -- and the ongoing concern that Washington won't ever find the willpower to tackle the major issues.

Congress needs to raise the debt ceiling, the cap on how much America can borrow. If Congress fails to do that on time, there would be a real chance that the U.S. government couldn't pay its bills in full. That could mean that retirees, businesses, veterans -- or bondholders -- might not get their money on time.

It would be a big blow to America's reputation. In a worst case scenario, it could lead to another downgrade in the nation's debt rating.

Wall Street remembers August 2011. Politicians fought bitterly over whether to raise the debt ceiling. It got so bad that Standard & Poor's cut America's AAA debt rating. That came in the midst of Europe's debt crisis, and stock markets around the world sold off.

Stocks came back. But S&P still hasn't restored the AAA rating, citing ongoing concerns about America's political stalemate.

The need for Washington to start dealing with some tough economic and financial issues is real. If Congress and the White House can't come together to pass a routine annual budget, how will they be able to do tax reform, trade deals, immigration policy and entitlement reform?

"A democracy is a compromise by its nature. It's not a dictatorship. So anyone who says, 'My way or the highway on one issue,' isn't necessarily thinking about the United States of America," J.P. Morgan (JPM) CEO Jamie Dimon said recently.

The perception is growing that American politicians can no longer handle tough decisions. A shutdown or debt crisis won't boost confidence.

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