The Ousting of Kevin McCarthy as House Speaker Raises Likelihood of Government Shutdown

The recent ousting of Republican Kevin McCarthy as House Speaker may not have an immediate impact on Wall Street, but it increases the chances of a government shutdown in the fourth quarter. This potential shutdown could contribute to further volatility in an already unstable market.

Potential Government Shutdown in November

Goldman Sachs chief economist Jan Hatzius suggests that the change in leadership raises the odds of a government shutdown in November. However, with several weeks until the deadline, various outcomes are still possible. Hatzius points out that numerous policy disputes remain, and the $120 billion difference between the parties on the preferred spending level for FY2024 makes it challenging for Congress to pass the necessary spending bills before funding expires on November 17. Although a fourth-quarter shutdown is likely, Hatzius believes a closure extending more than two to three weeks is unlikely.

Complications in Congress

While McCarthy’s removal may not significantly impact the market, it further complicates Congress’ ability to control spending. This comes at a time when escalating deficits are considered a major trigger for the recent rise in interest rates. Additionally, increasing oil prices add to the uncertainty and inflation concerns. Congress has until November 17 to reach a deal and avoid a government shutdown, but the decision on its next speaker adds another layer of complexity. Isaac Boltansky of BTIG states that the House’s paralysis could complicate the already intricate calculations surrounding the forthcoming funding fight.

Impact on the Defense Sector

The removal of McCarthy could potentially affect the defense sector. Deutsche Bank analyst Scott Deuschle suggests that the leadership change creates uncertainty, which contradicts the appeal of defense stocks in an uncertain environment. In an extreme scenario, the leadership issues could heighten the risk of the House failing to agree on a resolution for defense bills, including aid to Ukraine. This could negatively impact companies like Lockheed Martin and Northrop Grumman. However, General Dynamics and Huntington Ingalls Industries are better positioned due to their focus on shorter-cycle work and future budget growth.

Overall, the ousting of Kevin McCarthy as House Speaker raises concerns about a government shutdown and adds complexity to Congress’ efforts to control spending. The potential impact on the defense sector further contributes to market uncertainty.

Source: HaberTusba’s Michael Bloom