McCarthy's Ouster Amplifies Congressional Tensions, Goldman Sachs Anticipates Q4 Shutdown

The House of Representatives voted to remove Kevin McCarthy from his role as speaker Tuesday, marking a historic moment in U.S. politics.

This move came after eight Republicans crossed party lines to join Democrats in the ousting, following an initiative led by Rep. Matt Gaetz (R-Fla.).

Rep. Patrick McHenry (R-N.C.), the chair of the House Financial Services Committee since 2023, has assumed the position of interim Speaker until a new one is elected.

Alec Phillips, economist at Goldman Sachs, notes that this decision does not carry immediate policy consequences, nor does it affect government funding, as it has been extended until Nov. 17, 2023.

Immediate Policy and Funding Impact

Phillips believes it’s highly improbable that the House will remain without a leader until that date. In such an unlikely scenario, the Speaker pro tempore would likely have the authority to bring up another temporary funding extension for a vote, though the specifics hinge on a decision by the House Parliamentarian.

However, with unresolved policy disputes and a substantial $120 billion gap between parties regarding preferred spending levels for fiscal year 2024, the path to passing the necessary full-year spending bills before the Nov. 17 funding deadline appears challenging.

“The next speaker is likely to be under even more pressure to avoid passing another temporary extension—or additional funding for Ukraine—than former Speaker McCarthy had been,” Phillips wrote.

Goldman Sachs continues to anticipate a shutdown in Q4 as the base case scenario when the current funding extension expires.

This development in the House of Representatives underscores the uncertainty in U.S. politics, with potential ramifications for financial markets and economic stability.

Also Read: ADP Report: Private Sector Employment Falters In September, Far Below Expectations Amid Interest Rate Pressures

Market Implications

Just hours before the midnight deadline on Saturday, Sept. 30, Congress successfully passed a stopgap bill, averting a potential government shutdown.

However, throughout September, the markets experienced a month of heightened volatility due to elevated interest rates and the looming threat of a government shutdown.

A government shutdown would have resulted in the freezing of public employees’ salaries and a series of disruptions to non-essential services. This, in turn, could have led to a potential decline in consumer spending and reduced contracts for private companies associated with the public sector.

Among the industries most susceptible to the risks of a government shutdown in September were the defense and renewable energy sectors.

The iShares U.S. Aerospace & Defense ETF ITA, which includes industry giants like Lockheed Martin Corp. LMT and Boeing Co. BA, experienced a nearly 9% decline last month, marking its worst monthly performance in a year.

Solar and clean energy-related ETFs also faced significant declines, with the Invesco Solar ETF TAN down by 11%, and the Invesco WilderHill Clean Energy ETF PBW dropping by 13%.

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Image created using artificial intelligence with MidJourney.