After the Shutdown: Markets, Policy & the Wall of Worry

LIZ ANN SONDERS: I'm Liz Ann Sonders.

KATHY JONES: And I'm Kathy Jones.

LIZ ANN: And this is On Investing, an original podcast from Charles Schwab. Every week we analyze what's happening in the markets and discuss how it might affect your investments.

Well, hi, Kathy. Last week, we were both at Schwab's annual conference for investment advisors, what we call our IMPACT conference. We basically take over a city, in this case, Denver, and a convention center. It's a huge audience. And I wanted to ask you what sorts of questions you were getting there. You and I shared the stage together along with our guest on this episode.

But that was a limited amount of time, and I know some of our best conversations and our most meaty conversations tend to happen just throughout the course of the conference chit-chatting with clients. So what did you find were top-of-mind issues when you talked to advisors, portfolio managers in your world? What were the hot button topics?

KATHY: I would say in the fixed income world, worries about credit. We just had this shakeout, the surprise bankruptcies in a couple of companies in the auto sector. And that's kind of got people shaken up because what happened was these companies went to refinance some of their debt, and that's when analysts started looking through the paperwork and said, "Oh, wait a minute, these guys are in bad shape. We can't raise more money for them." And it was a big surprise, and big losses being taken on the part of some banks that were lenders. And we had the infamous quote from Jamie Dimon of JP Morgan saying, you know, "When you find one cockroach, there's probably more," meaning there's probably more bad credit out there that hasn't been uncovered, that we haven't seen yet, because market demand has been just so strong for any sort of yield that it's kind of a lot of people overlooked some of the risks. 

So that was really top-of-mind for a lot of people. It's like, "Where are the cockroaches?" A second thing is debt and deficits. This is perennially something we talk about a lot, but with the U.S. deficit-to-GDP running at close to 7% this year with no sign of discipline on the part of Congress to bring it down, that has a lot of people concerned about longer-term bonds and Treasury and how the Fed will manage through what may be a prolonged period of inflation and/or overhang of debt. So that was another big topic of discussion. 

And then we had sort of a generally a lot of concerns about, "How do you allocate to various asset classes in this environment?" So it's actually been a good year on fixed income. A lot of positive returns. Things have gone well, but maybe not in the categories people expected to go well, but in some that they didn't expect. So there's a lot of questions about asset allocation going forward. What does 2026 look like?

You know, at this point with so many policies up in the air, particularly Federal Reserve policy, that's still, as Mark Twain said, you know, "Making predictions is really hard, especially about the future." Or maybe that was Yogi Berra. I'm not really sure. But whoever it was, was a very wise person. So lot of conversations of that nature. What about you, Liz Ann? I'm assuming you heard many of the same things.

LIZ ANN: Yeah, certainly a lot of the same things, and by the way, when you said that, not to go off on a tangent, but one of my favorite Yogi Berra quotes that I often use a lot doesn't mean … it's meaningless, but it actually has meaning, which is, you know, "When you come to a fork in the road, take it." I've always loved that one. So I also was hearing interestingly a lot of questions about the credit markets and, you know, cockroaches, and I would just say, "Well, Kathy's here. Go find her." I don't know whether they found you, but that may be why you were getting a disproportionate number of questions on that.

KATHY: Am I the resident expert on cockroaches now? That's not a great, yeah, OK, yeah.

LIZ ANN: On credit, not on cockroaches. But, you know, always a lot of debt and deficit questions. But probably the most significant theme of questions was around AI. Every variety of "Is AI a bubble?" "Are you concerned about the circular financing?" Are there … maybe it was more landmines being used as opposed to cockroaches, to express concerns, valuation concerns. "What could tip this?" "Could it be just one major disappointment that then ripples through markets?" 

So I would say that was the overarching theme of questions. And they didn't tend to lead into a lot of really specific stock market questions. Most of the questions, even around AI, were much bigger picture, broader, macro. And I'm finding that at client events, too, is that most of the questions when I do our retail client events are bigger picture, macro. 

They always have sort of this tinge of concern. They're not expressed with a lot of optimism. There isn't a lot of questions about "What's the opportunity? What should I be most optimistic about?" And, as someone who's been an observer of investor sentiment for 40 years, maybe that's not a bad thing. Because it may be a reference to the whole … another old adage of, you know, "The market likes to climb a wall of worry," and there's a lot of focus on the bricks in that wall of worry. So had a lot of those conversations, and always the debt and deficit conversations. And when we shared the stage with our eminent guest here, it's one of the things that we talked about a bit, and I thought our guest had some interesting comments. So I'll table some of that, and I'll pepper him with questions on that. Why don't you introduce our fabulous guest, Kathy.

KATHY: Sure, Liz Ann. Great segue. This week, we are lucky to have our colleague and good friend Mike Townsend to talk politics and policy. He's an expert in the Washington arena, where so much is happening and affecting the markets. Mike is Schwab's Washington-based political analyst with more than 30 years of Washington experience. He analyzes legislative, regulatory, and political developments to determine how they might affect individual investors, retirement plan participants, and investment advisors. He's also the host of the great podcast WashingtonWise. If you haven't given it a listen yet, you can search for it in your podcast app or go to schwab.com/WashingtonWise. And like us, he posts regularly on X and LinkedIn. You can follow him @MikeTownsendCS on X and Mike-Townsend on LinkedIn, and we'll have a link to his social media accounts in the show notes. 

So Mike, thanks for joining us today.

MIKE: Well, thanks so much for having me. Great to be with you both.

KATHY: So I'm going to kick it off and then, Liz Ann, jump in. But it looks like we're getting the government back open here. And so walk us through the deal that has been reached and what that looks like, what that means, what might be different next week as opposed to last week.

MIKE: Sure, well, you know we went through 40+ days of a government shutdown and frankly ended up about where we were started 40 days ago. It's an agreement that we probably could have had 30 days ago, but it took this long to get there. Really three big elements. Number one, reopens the government. Does so by passing a temporary funding measure, which is known as a continuing resolution that extends funding for all government operations through January 30th of 2026. So that's the new deadline. We can talk about that new deadline in just a minute. It also passes three of the 12 underlying appropriations bills. So the whole reason the government shut down is because Congress is supposed to pass these 12 funding bills every year by the start of the fiscal year, which is October 1st for the federal government. And this year they passed exactly zero by that deadline. 

This new agreement passes three of them, the ones that fund agriculture, military construction and veterans, and the legislative branch. And the agriculture one is important because that means that there's full funding for SNAP, the Supplemental Nutrition Assistance Program, or food stamps, that provides important aid to about 42 million low-income Americans. And of course, that program has been kind of in limbo since it ran out of funding at the beginning of November. All programs and agencies covered under those three bills are fully funded through the rest of the fiscal year, which runs until September 30th of 2026.

So those are sort of now off the table for future negotiations. And then the third big bucket was sort of providing some clarity for federal workers. So it ensures that all federal workers will receive back pay. It ensures that the administration cannot fire any federal workers between now and January 30th. And it actually reinstates the roughly 4,000, 4,100 federal workers that the administration fired earlier in the shutdown. So provides some clarity there.

KATHY: So I have heard that there is a provision that was included in the bill that would allow some people in Congress to sue the U.S. government if information was gathered during an investigation from their phones, I guess? Something like they can sue for $500,000 if it turns out their data or their information was taken from their phones. What is that all about?

MIKE: Yeah, that actually goes back to the January 6th riots back a few years ago and the subsequent investigation into what happened. And it sort of came out that members of Congress had their phones' information accessed during that investigation, often without their knowledge or consent. So this would actually, I guess, go back and allow for retroactive suing under that. And as you said, I think it's a $500,000 per case maximum, if successful.

KATHY: So one other question and then I'll let Liz Ann pepper you with some questions. But the subsidies for the Affordable Care Act will not be extended, is that correct? So people who have been using those subsidies who have accessed the ACA for their insurance will presumably see the cost increase going forward.

MIKE: Yeah, that's right. And I think this is really, you know, sort of the flashpoint of this entire debate because this was kind of the line in the sand for most Democrats. And this deals with the fact that some subsidies that were put in place during the COVID period in the Biden years to help purchase health insurance through the Affordable Care Act, those were always set to expire at the end of 2025.

And as a result, an estimated 22 million Americans who purchased their health insurance through the Affordable Care Act would see their premiums go up for 2026. So Democrats wanted to have those extended for at least a year, if not longer, as part of the deal to reopen the government. Republicans said all along that that should be a separate discussion, not part of the reopening the government.

And ultimately, a handful of Democrats decided to move forward without a deal on that. And that's what has infuriated and created this big rift inside the Democratic Party because a lot of Democrats are mad at their colleagues for sort of capitulating on that. What they did get was an agreement from the Senate majority leader to hold a vote on the matter separately, sometime before the second week in December. But of course, there's no guarantee that that vote will pass. There's further no guarantee that the House of Representatives will take it up even if it did pass the Senate. So that's why there's this real sort of infighting going on within the Democratic Party in the wake of this decision by a handful of Democratic senators to join Republicans in reopening the government.

LIZ ANN: So Mike, speaking of reopening the government, that means we will start to get economic data that has not been released by government agencies, everything from the monthly jobs reports, which includes payrolls and the unemployment rate, weekly unemployment claims, which we haven't been getting at the federal level, although we have been getting at the state level. 

Other than the release of September's Consumer Price Index, which the administration called back members of the Bureau of Labor Statistics in order to release that because of cost-of-living adjustments for Social Security, we haven't gotten inflation data. Retail sales comes out through government. So you know, another big question I was getting is "At what point do we no longer have to worry about data efficacy? How clean is the data likely to be?" Because a lot of this data is based on surveys, and when you don't have the members of these organizations in conducting the surveys, what happens to the collection period?

I'm guessing the buzz is that the release of the September jobs report may be fairly clean because the collection period, the government was open. But what are you hearing in Washington about data efficacy and how long it might take for us to be confident that we're looking at relatively clean, robust readings?

MIKE: Yeah, Liz Ann, I think you've made a really important distinction between these reports that were sort of not released, but in the queue, like the September jobs report, which would have been released in early October, it was ready to go, presumably. And so they can release that. And these other reports for which the data hasn't actually even been collected. So they did not collect, they did not do the surveys in October that you would normally do in the first half of the month for the jobs report, for example. 

So I think there's going to be quite a period here of sort of catching up. And I expect that some of these first reports that come out are going to be based on estimates and sort of partial information. And the Bureau of Labor Statistics and other government agencies will go back and try to recreate that information and survey people about "What were you doing in October?" and "What were you doing in November?" and etc. But I think the sense here is that we're probably talking the end of the year, or even early January of 2026, before you really feel confident that the data has sort of caught up. And I think that puts obviously the Fed in a really odd position for that December meeting and even into the first of the year. So it's going to be a while before I think we have full confidence that we've got sort of data that we believe is really, really accurate.

LIZ ANN: Government's been shut down, but that hasn't affected the Supreme Court working on a few things. So with regard to what the Supreme Court is in the process of ruling on tariffs and the use of IEEPA, which International Emergency Economic Powers Act, where does that stand and what is your outlook for what might come down?

MIKE: Yeah, really interesting case. The oral arguments took place on November 5th, and they went about two and a half plus hours, which is pretty long for a case, before the Supreme Court. And I think it's really important to distinguish exactly what this case is about. This case is about the mechanism that the president used to impose tariffs, the so-called reciprocal tariffs on about 100 countries, as well as some of the tariffs on Canada, China, and Mexico, specifically the ones dealing with fentanyl and the frustration that the administration has with fentanyl crossing the borders. 

It is not about whether tariffs are good policy, bad policy, that kind of thing. So that's an important distinction because as you guys know, there are other ways for the administration to impose tariffs even if they were to lose this case, and they have been clear, in the administration, that they will use some of those other ways to impose tariffs. But as far as the case itself, you know, it certainly seemed like there was a lot of skepticism about the administration's position from the court. And I think most people who were observing those arguments came away thinking there's at least a pretty good chance that the administration will lose this case.

And that opens up a bunch of questions, particularly around refunds. I mean, you're talking north of $100 billion potentially having to be refunded to companies that paid the tariffs. The Supreme Court could sidestep that and sort of say that it'll only be effective going forward for tariffs, and they won't have refunds, but we just don't know. And then the other thing we don't know is the timing. Both sides asked for an expedited ruling, "expedited" and "Supreme Court" is kind of an oxymoron that, you know, doesn't … no one really knows what that means. 

I've heard the case could be decided as early as December, but there is absolutely no timetable or deadline. It may, you know, come down to how … are there dissents that need to be written? Is there a unanimous view or a near unanimous view? So how many opinions have to be written and that sort of thing. So it could be into the first quarter of 2026 before we get a decision on that.

LIZ ANN: Since you were here, Kathy and I opened this show here, we both talked about debt and deficit, and I said I would toss a question your way. We know, because we are talking to investors all the time, that this is something the investor class anyway cares deeply about. We're just not sure that the average constituent cares all that much about it or if they do, they care about it sort of in an abstract way, but they don't generally vote based on it. 

So my question to you is, I'm assuming you're going to say, therefore, neither side of the aisle is really focused on this issue. Will that ever change?

MIKE: Well, it's going to have to change at some point, but I would definitely say that the thought that anyone is really concerned about the debt or deficit on Capitol Hill sort of went out the window this summer with the passage of the One Big Beautiful Bill Act, you know, the big tax-and-spending bill that sort of quietly included a $5 trillion increase in the debt ceiling. And there were a number of Republicans on Capitol Hill who had never voted for a debt ceiling increase in their careers and voted for it this time.

And I think that's pretty significant. You talked about why there isn't much pressure sort of on Congress to do anything about it. From the constituent level, from the voter level, I just think $38 trillion of debt, which is where we're at right now, is a nonsense number to most people. It doesn't mean anything. And most people have very little understanding of how that affects their daily life or why they should care. And the result is that they're not protesting on the steps of the Capitol about it every day, like they're protesting about just about everything else you can think of here in Washington. And I think that contributes to not putting the pressure on members of Congress. I do think that the part that could put some pressure on members of Congress is the bond market.

And we've seen the bond market sort of act this way. We certainly saw the bond market put pressure on the administration back in April, when I think it was really bond market volatility that sparked the administration's sort of quick turnaround on tariffs and the pause of the tariffs in April. So I think we've seen signs that the bond market can put that kind of pressure on an administration, but we'll have to see whether that plays out going forward.

KATHY: Well, right now the bond market is pretty quiet and hasn't really reacted too strongly. We've seen some move up in yields, but hasn't been a major sort of reaction to this. I think, though, perhaps as things play out, there may be some further concerns. And it does, of course, affect the Federal Reserve. The prospect of ever-growing deficits is something that they have to deal with when they're managing their balance sheet.

And that reminds me, so Treasury has been issuing a lot of Treasury bills rather than going to coupons or longer-term bonds to fund the deficit because Treasury Secretary Bessent continues to talk about how he expects long term yields to come down and will want to take advantage of that. But, you know, that remains to be seen, right? 

But I think one of the other concerns that people have in the markets is this proposal for 50-year mortgages. So that came out along with another slew of sort of suggestions that got thrown out there. I don't know if that's something that we can actually expect to see happen, but do you know what the thought process is behind this? Because it doesn't seem to be addressing the housing affordability issue kind of head on, which is a supply constraint rather than necessarily addressing the demand or the cost of the mortgage. But do you think this is something that's really going to happen?

MIKE: Yeah, this is a fascinating sort of inside Washington story, the way that this blew up at the beginning of this week. So the backstory is that the head of the Federal Housing Finance Agency is a guy named Bill Pulte. And he went and talked to the president about this idea. And the president, sort of in the way that the president does, you know, kind of immediately put something out on social media, kind of floating this idea.

I think what was not expected is that there was sort of widespread panning of this idea from across the political spectrum, including on the very conservative side, mostly because the economics of it are really difficult to justify, right? I mean, it takes longer to get equity in your home, and you pay more and more interest over time if you have 50 years instead of 30 years or something like that. 

So the president has since kind of distanced himself, I think, a little bit from this idea. But it is, I think, reflective of sort of the freewheeling nature of President Trump himself and this administration, in which things on a day-to-day basis here are really driven by something that he says or puts on social media. And it kind of blows up into this big discussion. And then, you know, flames out as quickly as it started. And I think this is likely to be in that category of flaming out pretty quickly.

LIZ ANN: I wanted to dive in a little bit more on the One Big Beautiful Bill and maybe just ask a general question. If you've got more specifics, have at it. But I don't want to pin you down on specifics. But just in general, thinking about the passage of that bill, what have the impacts been already that are quantifiable, whether it's on the tax side, on the expensing side, and maybe what to pay most attention to as the calendar rolls over into 2026?

MIKE: I mean, I think some of the things that we haven't seen really the impact of yet, but people are going to start to see them when they prepare their taxes in the spring, because a whole bunch of tax proposals are retroactive to the beginning of 2025. And that's where those sort of campaign promises that the president made come into play. No taxes on tip income, no taxes on overtime hours, making the interest on auto loans tax deductible. And the fourth one is this new $6,000 deduction for seniors 65 and up. 

Now, I want to make sure I say that all of these have sort of income caps and other restrictions on them. But those are things that people are going to see on their tax return for this year. So I think come tax filing season, I think you'll see a real pickup in sort of just people noticing those. A lot of the rest of the bill is forward-looking. So the start in tax year 2026, for instance, the new estate tax exemption level, $15 million per person, that starts in 2026. Other things start in for tax year 2026 and proceed from there. But I think that's probably the most notable thing is that people are going to see some impact right away on their tax returns. 

And I'll say one other thing about those four campaign promises, new tax rules in particular, all of those sunset in 2028, meaning that they're in place for tax years '25 through '28. But the thing to keep in mind is that 2028, of course, is a presidential-election year. And I'm guessing that these are going to be pretty popular. I mean, no tax on tip income? I'm betting that people will like that.

So come 2028, and a presidential election year, are these just going to expire and go away? I'd be willing to put a pretty good bet down that those will get extended longer than that. I think that things like this have a way of sort of embedding themselves into the tax code. And I would put these so-called temporary provisions as… I bet temporary is going to be a lot longer than just the four years.

KATHY: You know, Mike, that reminds me of something I think you told me a couple of years ago, that every line in the tax code has a constituency, which is why it's so difficult to make changes, right? That are contrary to adding to the deficit. So I did want to ask you, though, sort of just to follow up to all this with the sort of capitulation on the part of the Democrats to reopen the government, what do you think the political fallout is longer term? Is this going to cause shift in leadership or is this just, you know, "OK, we went through this whole thing again and here we are back where we were before."

MIKE: Yeah, what I think is so interesting about this is, first of all, it just all seemed so predictable at the beginning of this, that this was going to be the outcome. And actually, if you look back historically at shutdowns that lasted more than a day or two, there have been eight since the Reagan era. And in all eight of those, you can look at the party that was doing the shutting down, essentially, and what they were demanding and whether they got what they demanded and they are pretty much 0-for-8 in these. 

You think of the shutdown in the first Trump administration, that was really about Trump wanting border-wall funding, and he didn't really get it, and he ended the shutdown anyway. So in that sense, this all seems so predictable. But I would also say that, historically, there are no real winners out of these. So, you know, I think Republicans are sort of feeling like, "See, we were right, the Democrats gave up." And you know, polling is showing that voters are blaming Republicans more than Democrats. Why? Because Republicans are in charge of the House, the Senate, and the White House. And the average person is not paying attention to the details of the shutdown and what they're fighting over. They're paying attention to the fact that they're not getting a paycheck or they're not getting their food stamps or whatever it is. And they look at that and say, "Well, the Republicans are in charge, so it must be their fault." 

So no one is going to come out of this looking well. Democrats are all mad at their leadership, but I don't think that's going to result in any change in leadership. And a couple weeks from now, everyone's going to have moved on to the next thing, and this will, again, become a historical footnote. So I don't know that anyone comes out of this looking good, but I don't know that anyone comes out of it, you know, looking for a new job or anything like that.

KATHY: So I guess we can conclude that government shutdowns are unpopular.

MIKE: They are unpopular. I mean, at the end of the day, was air travel, right? For all the other things that were impacted, I think the delays and problems in airports around the country, that was the catalyst that… really got people to…

LIZ ANN: And the lead into holiday season. 

MIKE: And the holiday, and the timing, and the holiday season. That's the catalyst that got us to a finish line. I had been saying for most of last month, there's no way that they could go into the Thanksgiving travel season with a government shutdown. And that ultimately proved to be true.

KATHY: Well thanks, Mike, really appreciate you jumping on to talk about this at the last minute. Really appreciate it.

LIZ ANN: Always fascinating. Thanks, Mike.

MIKE: Well, thanks so much to you both.

KATHY: So that's it for us this week. Thanks for listening. You can always keep up with us in real time on social media. I'm @KathyJones on X and LinkedIn. That's Kathy with a K.

LIZ ANN: And I'm @LizAnnSonders on X and LinkedIn. Make sure you're following me and not an imposter. Also, let's reiterate that that Mike Townsend is also on both X and LinkedIn and also give a listen to his fabulous podcast called WashingtonWise. Also, as a reminder, you can find all of our written reports, they're always chock full of charts and graphs and tables, at Schwab dot com slash learn.

And if you've enjoyed the show, we'd be so grateful if you would leave us a review on Apple Podcasts, a rating on Spotify or feedback wherever you listen or tell a friend or more about the show. And we will be back with a new episode next week.

For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.