Congress passes debt deal -- what's next for investors?

Updated at 10:14 p.m. ET

(MoneyWatch) Congressional passage of a bill to reopen the federal government and raise the debt ceiling is expected to bolster global stock markets Thursday, but some investors are already worrying over the prospects of another fiscal clash in Washington early next year.

Senators approved the bill late Wednesday by a vote of 81 to 18. Lawmakers in the House, where opposition to Obamacare from hard-line Republicans had precipitated the shutdown and fueled the brinksmanship over the debt ceiling, passed the legislation around 10:13 p.m. ET by a vote of 285 to 144. President Obama is expected to sign the bill into law immediately.

"Once again I want to thank the leadership for coming together and getting this done," Mr. Obama said after the Senate vote in a White House press briefing. "Hopefully next time it won't be in the eleventh hour."

Certainly, the relief on Wall Street was palpable Wednesday after Senate leaders said they had struck a deal to reopen the federal government and raise the debt ceiling. Propelled by reports earlier in the day that Congress was making progress on a bill to avert an unprecedented U.S. debt default, the S&P 500 index rose 23 points to 1,722, close to the index's all-time high on Sept. 18 of 1,726. The Dow Jones industrial average gained speed near the end of the trading session to end at 15,374, up 206 points. 

Although lawmakers appear to have headed off a potentially devastating default, Wall Street excitement over the deal may prove short-lived, experts warn. The reality is that any hike in the debt limit will be short-term and that stocks were already trading near record highs before the latest fracas in Washington. Corporate earnings for the third quarter also have been mixed, raising the likelihood of a pullback.

"This could be one of those 'buy the rumor, sell the news' events," said Mark Luschini, chief investment strategist with broker-dealer Janney Montgomery Scott. "I expect to see some profit-taking because we're getting to the levels we were at before all the trouble."

Another restraining factor is the dearth of government economic releases since federal agencies were forced to shut their doors earlier this month. The data vacuum has left forecasters in the dark about how quickly the economy is expanding and whether job growth, which has been tepid in recent months, is picking up. If government employees return to work tomorrow, Labor Department staff could release the delayed September job numbers as early as Friday.

Experts say the standoff in Washington has only worsened the drag. The partial government shutdown has reduced economic growth by $24 billion, slicing an annualized 0.6 percent off GDP in the fourth quarter, according to Standard & Poor's. The credit agency lowered its growth forecast for the period to roughly 2 percent, from 3 percent. And when the flow of government economic data finally does resume, the news may not be good.

"Consumers were clearly losing momentum since the start of the year as a result of lackluster job creation and minimal income growth, but a dysfunctional government is further undermining confidence and exacerbating cautious spending patterns," said Lindsey Piegza, chief economist with brokerage firm Sterne Agee, in a research note. "Back-to-school sales were lackluster, and retailers are reporting increasingly disappointing September sales despite early discounting."

If economic weakness continues, that slowdown could boost stocks since it might deter Federal Reserve officials from starting to tighten the spigot on the trillions of dollars the central bank has injected into the economy to stimulate growth. The policy, known as "quantitative easing," has helped fuel a five-year run-up in stock prices. Before the shutdown, many analysts expected the central bank to scale back its $85 billion-a-month bond purchase program by year-end. But a growing number of forecasters now expect the Fed to hold the line until well into 2014, lending support to financial markets.

More troubling is the risk of another demoralizing political standoff early next year. Under the plan announced by Senate Majority Leader Harry Reid, D-Nev., and Senate Minority Leader Mitch McConnell, R-Ky., Congress would fund the government through Jan. 15 and extend its borrowing authority through Feb. 7. That leaves little time for lawmakers to come to agreement on contentious issues like taxes and spending that could be at the center of budget talks early next year. 

The economy also faces a possible hit in the form of additional government spending cuts. A related bill requires a joint congressional committee to propose a budget plan for the next 10 years by Dec. 13. If it fails, a second round of government-mandated sequester cuts would take effect Jan. 1.

Indeed, some experts fear that any remedies lawmakers might devise as part of future budget talks, such as a proposed plan to slow the growth of Social Security payments, could prove worse than the cure. Josh Bivens, research and policy director with the liberal Economic Policy Institute, warns that a renewed focus in Washington on deficit-reduction could hurt the recovery by diminishing people's income. Consumer spending accounts for roughly 70 percent of economic activity in the U.S.

"Programs like Social Security, Medicare and Medicaid are really the only things that have been working well for low- and middle-income families for the past generation," he said.

An analysis this week by Macroeconomic Advisers for the Pete G. Peterson Foundation, a Washington think-tank that focuses on fiscal issues, found that the massive cuts in government outlays since 2010 have raised the unemployment rate by 0.8 percent, equivalent to 1.2 million jobs.

Lawmakers "are only deferring, not triaging, the situation," Luschini said. "That leaves me with some trepidation that we'll be revisiting this in the not too distance future."