With Congress in chaos following the ouster of House Speaker Kevin McCarthy, the odds of a government shutdown occurring in November just went up exponentially. It also increases the risks of a stock market crash.
While a government shutdown was narrowly averted on Sept. 30, federal funding has only been secured through Nov. 17 by the stopgap legislation McCarthy managed to push through the House of Representatives and Senate. Without a new deal being brokered between Republicans and Democrats, a shutdown of the federal government could occur on Nov. 18, a situation that would likely throw already jittery markets for a loop.
The Downfall of Kevin McCarthy
Kevin McCarthy has made history by becoming the first Speaker of the U.S. House of Representatives to be ousted from the job. The Republican Congressman’s fate was sealed when he brokered the passage of a stopgap spending bill to keep the U.S. government running with support from the rival Democratic Party. McCarthy’s cooperation with the Democrats angered a small group of hardline conservatives who quickly took steps to vote him out as Speaker.
In a historic vote, eight Republicans joined with all Democrats in voting to remove McCarthy through a procedure called a “motion to vacate.” In the end, members of the House of Representatives voted 216 to 210 in favor of removing McCarthy as Speaker, with some members not present for the vote. McCarthy said he will not run for House Speaker again. Republican Congressman Patrick McHenry was chosen to preside temporarily over the lower chamber of Congress until a new permanent Speaker is chosen.
Getting agreement on long-term funding to keep the U.S. government afloat after Nov. 17 has now been complicated by the lack of a House Speaker. While Republican lawmakers fight amongst themselves, no negotiations are taking place with the Democrats. The next House Speaker is likely to face continued issues caused by Republican hardliners who continuously block their own party’s legislation and upend their political strategies.
What It Means for Markets and a Potential Stock Market Crash
Stocks are already on edge and slumping due to a combination of worries that include bond yields that are at their highest level in more than 15 years, crude oil prices that are back above $85 a barrel, a rapid economic slowdown in China, and the prospect that interest rates could remain higher for much longer than previously anticipated. The stock market slump that began in August has accelerated, with the Dow Jones Industrial Average having now turned negative on the year.
A leadership vacuum in the House of Representatives following McCarthy’s removal as speaker, coupled with the prospect of a government shutdown on Nov. 18, is only adding to the uncertainty that is pulling equities lower right now. Talk is growing online of a perfect storm developing that could lead to a market crash. Moody’s recently warned that Washington’s political polarization could result in a rating downgrade on U.S. debt as the turmoil negatively impacts America’s fiscal situation.
What’s Next
While several names are being bandied about for the role of House Speaker, chief among them Louisiana Republican Steve Scalise, it is not yet clear who might take up the gavel in the coming weeks. It’s also not clear how Republicans and Democrats will find consensus on funding the federal government past Nov. 17. The political uncertainty is likely to intensify in the coming weeks and exert further downward pressure on stocks. Investors should prepare for more drama ahead.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
