The biggest risk to equity markets and the economy in 2014 is dysfunction in Washington, following the strongest year in American stocks in a decade, according to CBOE Holdings Inc.’s William Brodsky and Ariel Investments LLC’s Mellody Hobson.
U.S. politicians need to regain their “sanity” for confidence to reach its full potential, said Hobson, president of Chicago-based Ariel, at the opening panel of “The Year Ahead: 2014,” a two-day conference sponsored by Bloomberg LP in Chicago. This year’s fight over lifting the country’s debt ceiling suggests Congress isn’t financially literate, she said.
Events in Washington are “the cause of many of the problems” with the economy, said Brodsky, executive chairman of CBOE Holdings, the biggest options exchange operator.
The fiscal battle between President Barack Obama and Congressional Republicans has dominated political headlines this year. The fight has brought automatic spending cuts and a 16-day government shutdown that saw federal employees furloughed for a combined total of 6.6 million days. Brinkmanship over the federal debt ceiling brought concern of a global economic meltdown before the limit was raised last month.
So far, the equities market shows few signs of being damaged by Washington’s budget battle. The Standard & Poor’s 500 Index is up 26 percent this year, putting it on track for the biggest annual gain since 2003, as the Federal Reserve kept its monetary stimulus to spur economic growth and corporate earnings topped analysts’ estimates. Three rounds of monetary stimulus have helped propel the S&P 500 up 165 percent from a bear-market low in 2009.
Gross domestic product climbed more than projected in the third quarter heading into the budget impasse. Economists expect growth of 2.6 percent next year, after an expected gain of 1.7 percent this year.
“I don’t think 2014 is going to be that great, and will be about like 2013, which is modest growth,” said Austan Goolsbee, professor of economics at University of Chicago’s Booth School of Business.
Goolsbee, who was a senior official in President Obama’s first term, serving on the Council of Economic Advisers and on the President’s Economic Recovery Advisory Board, disagreed with his fellow panelists’ view. While Washington was hurt, 90 percent or more of the economy is not affected by political tussles, he said.
“The reason we didn’t have a V-shaped recovery, I think, is that we had a bubble that popped and we can’t go back to doing what the economy was doing before,” Goolsbee said. “Remember that for 90 years up to 1998, house prices grew about 40 basis points a year in real terms. It was a slow, steady asset,” said Goolsbee.
Hobson said housing is the “silver bullet” to generate better consumer confidence.
“Housing and how people feel about the wealth of their home or what kind of equity they have in it definitely affects other things,” she said. “There are so many jobs tied to that industry, so as housing recovers you’ll see the unemployment story hopefully get better and I think people will go out and buy things.”
Lawmakers show no signs of agreeing on a federal budget for the 2014 fiscal year, which may trigger more automatic spending cuts in a matter of months. They face a Feb. 7 deadline for raising the nation’s borrowing limit. And questions remain about how the Affordable Care Act will affect what Americans pay for health care.
“What we saw suggested such a lack of understanding of the seriousness of some of the implications that if we could just get rid of that we’d much further ahead than where we are,” Hobson said.