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Afghanistan Crisis Could Set Back Biden Legislative Push

The gap between Wall Street and the rest of the globe has rarely been so wide. Despite the United States’ foreign policy failure in Afghanistan and falling consumer confidence at home, the Dow Jones Industrial Average and S&P 500 hit new intraday highs on Monday, while the Nasdaq Composite is hovering just below its all-time high. 

While the chaotic scenes in Kabul following the Taliban’s victory had little direct impact on Wall Street — scenes eerily reminiscent of the humiliating 1975 exit from the US embassy in Saigon at the end of the Vietnam war — the prospects for President Joe Biden’s ambitious legislative agenda have been cast into doubt.

To be sure, terminating the United States’ engagement in Afghanistan drew widespread support. The White House, on the other hand, will undoubtedly suffer politically as a result of the botched exit.

President Joe Biden recognized that events in Afghanistan “had unfolded more quickly than we anticipated” in a statement released Monday afternoon. However, he blamed the Taliban takeover on Kabul’s leadership and the Afghan military’s lack of “desire to combat” the terrorists.

“President Donald Trump laid the stage for a hasty exit from Afghanistan, and Biden simply followed Trump’s lead.” In a client note, James Lucier, a Washington analyst with Capital Alpha Partners, says, “There is no doubting that the manner of departing was catastrophic and shambolic, and it throws into question the foreign political acumen that was the primary credential of the Biden Administration.”

President Donald Trump set the stage for abrupt withdrawal from Afghanistan

This couldn’t have come at a worse time for the Biden administration as it seeks to advance its legislative agenda, he adds. 

House Speaker Nancy Pelosi (D., Calif.) pivoted Sunday to move forward on the $1 trillion bipartisan infrastructure bill along with the $3.5 trillion budget reconciliation package. But nine House Democrats have called for passage of the bipartisan infrastructure measure before voting on the budget reconciliation bill. 

Progressives want the two to move together. Given solid GOP opposition to the reconciliation bill, House Democrats can afford only three defections in light of their slim majority. 

The political clout of the Biden administration will be diminished, at least temporarily, when it is needed most to get its agenda passed, Lucier says. As a result, the legislative process could be slower and might be scaled back compared to what might have happened if the exit from Afghanistan been smoother, he says. 

Financial markets, meanwhile, face growing uncertainties on the economic home front. 

Last Friday, the University of Michigan reported its consumer sentiment index plunged in August to 70.2 from 81.2 a month earlier, the steepest drop since April 2020, during the dark early days of the pandemic. The reading on current conditions fell, and the outlook for future business conditions dropped to its lowest reading in eight years, David Rosenberg, founder of Rosenberg Research, wrote in his Monday missive. 

While inflation expectations remain elevated, sentiment for “buying conditions” fell sharply, as stimulus checks brought forward lots of spending, he said. In particular, nearly 70% of respondents said now is a “bad time to buy a house,” the highest reading since August 1982, and a stunning collapse from a recent peak positive reading last December. At the same time, expectations for respondents’ personal financial position in 12 months worsened, while expectations for business conditions a year out plummeted. 

All this bodes poorly for Democrats in the 2022 mid-term elections, Rosenberg wrote. While expectations among Republicans had already fallen sharply after last November’s election, they have started to turn more negative among independents and Democrats, which could make things “very challenging for Biden’s presidency over the coming months as the economic recovery wanes,” Rosenberg said. 

Bond yields resumed their decline following Friday’s downbeat University of Michigan sentiment numbers. At about 1.25%, the benchmark 10-year Treasury sits roughly halfway between last week’s high of 1.375% and the previous week’s low of 1.125%. Commodity prices are again under pressure with economically sensitive copper and crude oil sliding on signs that China, the world’s No. 2 economy, shows signs of slowing. 

From the bad-news-is-good-news partisans, signs of worsening consumer attitudes supposedly are bullish for stocks, based on history. Such episodes typically spurred the Federal Reserve to ease. But the next move for monetary policy is toward greater restraint. 

Fed officials are likely to begin to reduce the central bank’s $120 billion monthly securities purchases in about three months if the economy’s recovery proceeds as they expect, the Wall Street Journal reported. The Fed’s asset purchases could end by the middle of 2022, the Journal said. 

Inflation has moved to the top of consumers’ concerns, with the consumer price index up 5.4% in July from a year ago, the steepest increase since 2008. That ran ahead of the 4.6% rise in average weekly earnings, leaving consumers behind in real, or inflation-adjusted terms, which was reflected in the downbeat University of Michigan data. 

At a minimum, the stock market could become increasingly volatile. Until now, the S&P 500 has moved up steadily in an ever-narrowing range, writes Julian Emanuel, chief equity and derivatives strategist at BTIG, in a research note. A dip below the index’s 50-day moving average, 4332.12 as of Friday, could break that band. To profit, he suggests a “strangle,” combining the purchase of an upside call option with a 4510 strike price, and a simultaneous purchase of a 4330 bearish put, both with a Sept. 30 expiry, based on the Aug. 13 cash close of 4468. 

The stock market’s recent advance has been almost boring, as the major averages have moved up without drama. Now, the contrast between high stock prices and a slowing economy and worsening political problems for the White House could make things more challenging for investors. 

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