Stocks stymied without a U.S. debt deal

NEW YORK Sat Jul 16, 2011 7:46am EDT

Pedestrians walk past The National Debt Clock, which displays the current United States gross national debt and each American family's share, on a wall in midtown Manhattan, in New York July 13, 2011. REUTERS/Brendan McDermid

Pedestrians walk past The National Debt Clock, which displays the current United States gross national debt and each American family's share, on a wall in midtown Manhattan, in New York July 13, 2011.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - Stocks will be hard pressed to turn the tide of recent selling next week as political jousting over raising the United States' debt ceiling intensifies.

The benchmark S&P 500 index this week recorded its worst weekly loss in five weeks.

Investors, frustrated by the lack of progress in the debate between the Democrat-controlled White House and Senate and the Republican-majority House, could move into what are perceived as safer assets, such as cash.

While the wrangling over the debt ceiling takes center stage, earnings season will continue to heat up after a solid first week. According to Thomson Reuters data, 39 companies in the benchmark S&P 500 index .SPX have posted results, with 74 percent reporting earnings that topped Wall Street estimates.

Companies in the index are forecast to show a 6.5 percent rise in profits over the second quarter of 2010 when all the reports are in.

For this week, the S&P 500 ended down 2.1 percent; the Dow fell 1.4 percent and the Nasdaq declined 2.5 percent.

The overhang from the debt ceiling issue could diminish the focus on earnings.

House Speaker John Boehner, the top Republican in Congress, said President Barack Obama and Democrats had still not put a serious deficit plan on the table, underscoring the acrimony in negotiations to avert a government default.

"The news flow next week dealing with the deficit issues and the political posturing that is taking place is going to intensify and is really going to drive these markets," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

"People are starting to get nervous about what they are seeing out there. For a portfolio manager -- let alone an average investor -- this is a treacherous market to be trying to position yourself in."


Economic data on tap for next week includes several reports on the housing market -- June housing starts on Tuesday and existing-home sales on Wednesday. In addition, data is due on leading economic indicators for June and the Philadelphia Fed survey of manufacturing activity in the Mid-Atlantic region. Economic reports over the last month have raised questions about the health of the U.S. recovery.

"The bigger picture is the economy is still a disaster," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

Saluzzi said people still are watching earnings for signs growth may be stagnating. "Eventually, companies are not going to keep cutting costs."

Quarterly results are expected from a slew of companies next week, with more than 10 Dow components scheduled to report.

Major financial companies due to report include Goldman Sachs (GS.N), Morgan Stanley (MS.N), Bank of America Corp (BAC.N) and American Express (AXP.N). Also on the calendar are earnings news from technology companies Apple Inc (AAPL.O), Microsoft Corp (MSFT.O) and Intel Corp (INTC.O).

"Let's see what all the rest of these guys have. Let's see if it's still being driven by cost cuts or are they actually getting revenue gains. That is going to tell me a lot more than if they cut the debt deal," said Saluzzi.

After the S&P 500 weekly loss, the index was just below its 50-day moving average, a technical level which could indicate more selling. Some analysts believe the market could still come back if the U.S. debt issue is resolved soon.

"This area, as far as it pulling back, is balancing the threat of a default, but it would take an actual default to take us much lower than here," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.

But the longer the debt ceiling question continues without a conclusion, the bigger the risk for further declines in stocks and for volatility to spike. The CBOE Volatility index .VIX rose nearly 30 percent for the week

"The more it drags out into Tuesday, Wednesday, Thursday or whatever, then we've got some serious issues. That will be an overhang no matter how good the financials come in terms of earnings reports next week," said Tommy Huie, chief investment officer of BMO Asset Management U.S. in Milwaukee, Wisconsin.

"It could be a pretty volatile week, no doubt about it."

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)

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Comments (2)
breezinthru wrote:
I think investors are now numb to bad news, even the professionals.

If this were 2006 or almost anytime during the preceding 60 years and there was news of eight European banks with insufficient assets to withstand a likely recession, intransigent levels of high unemployment, US mortgage defaults occurring at near record rates, one country in southern Europe in pending default and all of the rest of the countries of southern Europe on the edge of default, civil unrest and/or revolution in the most of the countries who are members of OPEC, the US was setting trade deficit records, the price of oil was occasionally breeching $100 a barrel, and the American President and Congress were actually speaking publicly about the possibility of defaulting on its financial obligations and speculating about what the ramifications of that default would be…

there would be no such thing as news good enough to keep the financial markets from collapsing like a Haiti high rise during an earthquake, yet the markets are holding fairly steady, occasionally rising and falling within narrow limits as though there is nothing at all wrong.

In 2006, any single one of the aforementioned scenarios would have caused a panicked sell off. Instead, when one turns to the financial news these days, it is strewn with advice and discussions regarding bullish opportunities, price performance, M&A’s, and IPO’s, sprinkled with token obligatory nods to risk.

It’s surreal if you think about it.

If Congress and President Obama come to any kind of agreement, there are many who would hope to enter into a euphoric buying spree.

Since 2009, markets are almost completely unhinged from reality, driven more by the demand for equites than prospects for the economic stability and long term growth over the coming decade.

Jul 16, 2011 11:03am EDT  --  Report as abuse
AMeddaugh wrote:
This debt ceiling issue really needs to be resolved and it needs to be resolved fast.

Jul 16, 2011 4:35pm EDT  --  Report as abuse
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