Kevin McCarthy is off duty after avoiding a government shutdown. The United States got worse.

Kevin McCarthy is out as Speaker of the House, and the financial markets are in trouble.

Normally, we like to think that what happens in Washington stays in Washington, at least when it comes to the stock market. Over time, the S&P 500 rises, regardless of who holds office. But what just happened in the House of Representatives is unprecedented. Never before has a House speaker been removed in this way midway through his term, and it is unlikely that a new speaker will be chosen quickly. This means that the government avoided a lockdown only to see something potentially worse to take its place.

I don’t think the markets haven’t noticed. Bonds were sold as

10 year return

It rose to nearly 4.8% at 5:38 p.m., instead

iShares 20+ Year Treasure Bond ETF

(TLT) fell 2.2% during market hours. the

Standard & Poor’s 500

It decreased by 1.4%

Dow Jones Industrial Average

It fell 430.97 points, or 1.3%. It wasn’t all the madness in Washington, but it wasn’t part of the reason for the sell-off either.

“If you’re wondering why bond markets have been so dysfunctional in the last few weeks, look no further than the dysfunction in Congress,” says Jamie Cox, managing partner at Harris Financial Group.

McCarthy’s ouster may be unprecedented, but the political chaos contributing to market volatility is not. Most market strategists tend to look at stock market performance when Congress is unified or divided. However, they rarely consider what happens when there are narrow majorities in the House and Senate. Periods of “tight government,” as Julian Emanuel, a strategist at Evercore ISI, calls them, can be much more difficult — and more volatile. Emanuel points out that there have only been eight terms in which the Senate majority was tied to two or fewer seats and the House to 10 or fewer seats, and the election year was particularly dramatic — all eight other terms saw double-digit moves, with three being positive and five being negative. . “The message is clear: prepare for more volatility,” Emanuel wrote on September 24, before the current shenanigans began. “In the near term, confusion carries stocks’ October seasonal decline to the 4,200 SPX level.”

Emanuel also sees the stock market reacting to Washington’s dysfunction. “The profound political uncertainty defined by ‘tight government’…[is] This caused a lot of volatility in the market, much more than usual. “In this regard, today’s news combined with the rise in yields has had a complete impact on the markets. Markets do not like uncertainty. There is more uncertainty today than there was yesterday.”

The House of Representatives has less than 45 days before it has to fund the government again, and there is no indication that Republicans will be able to rally around a single candidate for Speaker of the House. Without that, Congress could be hard-pressed to reach a deal to fund the government when the current temporary bill expires in November. It’s the worst-case scenario, but it’s worth considering.

In all likelihood, this too will pass. Those who hold this view are Ed Mills of Raymond James, Chris Mickens, and Alex Anderson. “We will assign limited market impact to the removal of Speaker McCarthy,” they wrote. “The selection of Patrick McHenry as interim Speaker should allay any potential near-term concerns. However, every moment the House is focused on who will be Speaker is a time the House is not working to finance the government throughout the remainder of the fiscal year.

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No, Washington won’t be the deciding factor in determining whether markets are able to recover from their recent swoon, but with the S&P 500 already down, the dysfunction comes at a painful time for investors.

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Write to Ben Levisohn at [email protected]

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