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A couple of big events last week gave a strong signal that investors have little to fear this year from our dysfunctional government in Washington.
That's remarkable considering how much damage our leaders have done to stock markets over the last three years.
From the loss of Standard & Poor's AAA sovereign-debt rating in August 2011 through the fiscal-cliff melodrama in late 2012 to last fall's government shutdown, our elected officials in Washington have undermined investors' confidence and sent stock markets reeling.
But the testimony of new Federal Reserve Chairwoman Janet Yellen before a House committee last week and the passage of a "clean" debt-limit bill by both houses of Congress clear some big potential roadblocks out of the way for the rest of 2014. They could even mean the end of an era in which Washington moved markets, mostly for the worst.
Investors responded by giving the S&P 500 (.SPX) its best week of the year to date.
The buying picked up steam during Yellen's testimony. "The S&P 500 rose steadily as Ms. Yellen testified … as markets accustomed themselves to their new overseer," the Financial Times reported.
The new Fed chair didn't say anything new; in fact, Yellen indicated she would continue predecessor Ben Bernanke's efforts to "taper" the Fed's extraordinary bond-buying program.
Although Yellen said she would not be swayed by weak economic reports in December and January, she also suggested the Fed's overall monetary policy would remain loose for quite a while — in short, tapering but no tightening.
That's exactly what investors have expected since Bernanke revealed late last year that quantitative easing might end some time in 2014.
Yellen's calm demeanor and relatively plain-spoken manner got positive reviews from Democrats and Republicans alike. "I've understood more of what you've said today than I have of the last two folks who were in front of us," said Rep. Shelley Moore Capito, a Republican from West Virginia. That may be damning with faint praise, but it's still praise.
Bottom line: Yellen's testimony reassured investors of a smooth leadership transition at the Fed. The release of minutes from January's Federal Open Market Committee created some confusion on future monetary policy, but remember: She's in charge, and the FOMC will follow her lead.
That same day, the House of Representatives debated the extension of the debt limit, the amount of money Congress authorizes the government to spend to pay its bills.
That has been the center of a war over spending and taxes that has raged since the insurgent tea party helped Republicans win control of the House in 2010. The tea party won the first battle in 2011 by getting massive spending cuts through the blunt instrument of the "sequester" as the price of extending the debt ceiling. But by early 2013 President Obama got $600 billion in tax increases on wealthy Americans over 10 years to end the "fiscal cliff" crisis — something Republicans had said they would never allow.
Again last year, the president and Treasury Secretary Jack Lew vowed not to negotiate a debt-limit extension, and Republicans caved. When House Republicans engineered the government shutdown last fall, the GOP got its head handed to it in the polls.
Now that they think they have a political winner in attacking Obamacare in the upcoming midterm elections, Republican leaders in both the House and Senate decided not to risk another battle over the debt ceiling.
So House Speaker John Boehner put a clean debt-limit extension on the floor of the House even though the overwhelming majority of Republican members opposed it. Senate Minority Leader Mitch McConnell joined several other Republicans to break a filibuster, and the Democratic majority passed a bill similar to the one that got through the House. And Congress got out of town before the latest snowstorm hit.
That means we won't revisit this issue until March 2015, and who knows what will happen then? But that's a year away. As the astute Washington analyst Chris Krueger of Guggenheim Partners put it: "With the debt-ceiling threat now essentially eliminated for a year, the macro tail-risk threat from Washington is remarkably light with a relatively clear horizon to the Nov. 4 election."
And the AP reported that "lawmakers have all but wrapped up their most consequential work of 2014, at least until the results of the fall election are known."
We can all wring our hands at the laziness and expediency of Congress, particularly when we have so many problems to work on. But remember that famous quote popularized by Mark Twain: "No man's life, liberty or property are safe while the legislature is in session."
So, by doing no harm, the Yellen Fed and Congress may both wind up doing some good in 2014, as far as investors are concerned. Other things may stop this market in its tracks, but at least this time it won't be Washington's fault.
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