Last week’s solar eclipse provided a brief diversion for those of us who weren’t on summer vacation. The streets near our New York headquarters were filled for a couple hours with giddy folks enjoying the spectacle. One thing they say about an eclipse is to avoid looking at it directly, so in the run-up to the event, there were many stories in the media about protecting your eyes with those funny-looking cardboard glasses.

If you want to apply the “do not look directly” notion elsewhere, a good candidate is Washington. The increasingly circus-like goings-on in DC are becoming a major distraction for financial markets. Talk of a government shutdown, dysfunctional policymaking and conflicts — not just between Democrats and Republicans, but among Republicans themselves — have many market observers dumbfounded.

Typically, this time of year is sleepy, with low trading volumes and not much news, as most market professionals take some vacation. But when September rolls around, Wall Street will be back at full throttle and for better or worse will likely be highly cognisant of progress (or lack thereof) in Congress toward achieving key goals.

Stacked agenda

There’s a lot to get done next month in the 12 days when both the House and Senate will be in session:

• Increase the debt ceiling. Congress must raise the debt ceiling by September 29, when the Treasury Department says the government will run out of cash to pay its obligations (although there is likely some room here to go beyond the end of September). Senate Majority Leader Mitch McConnell has said there is “zero chance” of default, but some conservatives want to attach reform conditions that could face opposition from those who want a “clean” debt bill that’s free of partisan amendments.

• Fund the government. Congress needs to approve a funding bill by September 30 to keep the government running into the next fiscal year. Typically that’s been accomplished through a “continuing resolution” (CR) that provides funding at current levels until a full budget deal can be ironed out. In a more normal environment, a CR would be a slam dunk, but the President recently threatened a government shutdown to force border-wall funding.

• Extend other key programs. The Children’s Health Insurance Program, which provides health care to 9 million children, needs refunding, as does the National Flood Insurance Program. The FAA is also scheduled for reauthorization.

Larger targets to follow

Assuming funding and the debt ceiling are addressed, Congress can focus on larger targets: namely, passing a full budget and tax legislation.

Movement on taxes would be of keen interest to the markets. Back in November, the initial run-up in stocks was tied largely to optimism about a shift to pro-growth government policy, including a rollback in regulation and, perhaps most importantly, structural changes to the US tax code. Executive orders helped initiate legislative change, but the health care battle and political infighting greatly reduced expectations for tax reform.

Valuations

Fortunately, earnings growth stepped in as a key support for equities, with the S&P 500 experiencing double-digit gains in the first half of the year. The improving global growth picture, as well as the weak dollar (down more than 10 per cent year-to-date), will likely support US profits moving forward. Still, valuations in US equities seem a bit stretched compared to counterparts in Europe and emerging markets, while potential for global unwinding of quantitative easing could have a dampening effect across the board.

With that in mind, a tax package, even if it only amounts to modest cuts to corporate/individual rates and an agreement to repatriate overseas corporate earnings, could provide a helpful spark to the ageing US equity bull market. That’s assuming the politicians can dampen the vitriol and work together (perish the thought!) to get things done.

Just try not to look too closely while it happens.

— Joseph V. Amato, President and Chief Investment Officer — Equities