By Caroline Valetkevitch
NEW YORK Oct 6 U.S. stocks are likely to face
another week of rising turbulence as efforts to settle the
budget dispute in Washington drag on, leaving investors worried
about the more critical issue of raising the U.S. debt ceiling.
The budget impasse has led to a partial U.S. government
shutdown for nearly a week, already longer than many investors
While stocks ended higher on Friday, the S&P 500 posted a
loss for the week and the CBOE Volatility index - the
market's fear index - rose to 16.89, up from 13.12 on Sept. 20.
The index is still at relatively low levels, but options-market
trading suggests investors are starting to guard against
The larger issue for investors is that efforts to solve the
budget problem could become entangled with the issue of raising
the debt limit. If the $16.7 trillion borrowing cap is not
increased, it could lead to a possible U.S. default.
"It's not likely, but it's certainly a remote possibility.
That is the big fear, because that's an event that has not been
discounted by the market," said Quincy Krosby, a market
strategist for Prudential Financial, which is based in Newark,
New Jersey. "And it's not just a domestic event; it's a global
The Treasury has said the United States will exhaust its
borrowing authority no later than Oct. 17. Republican House
Speaker John Boehner told his party colleagues he would work to
avoid a U.S. debt default, according to reports, helping stocks
on Friday. But there is little hard evidence that the stand-off
is nearing a resolution.
The dilemma has stopped the market's climb that took it to a
record close on Sept. 18, when the Federal Reserve decided
against trimming its stimulus plan. The S&P 500 has lost 2
percent since that date.
The utilities sector, with its high-yielding dividend
payers, has lost the most of any S&P 500 sector since the
shutdown's start. However, real estate, consumer and
professional services and capital goods have also suffered,
according to Bespoke Investment Group.
Real estate as an industry group, which depends on interest
rates that could rise in the event of a default, is down 0.8
percent. Utilities have lost 0.7 percent. Shares of home builder
DR Horton are down 4.6 percent since Monday's close.
Shares of defense contractor Lockheed Martin have
fallen 4 percent. Defense stocks are vulnerable because they
depend on contract work from the government for revenue.
Part of the S&P's decline since the Fed announcement has
also been on concern the economy is weaker than many investors
had thought, with the Fed having lowering its economic forecasts
for both 2013 and 2014.
One fear is the U.S. government shutdown could threaten the
fragile economic recovery, and some analysts have even suggested
it could push the U.S. economy back into recession.
"With the government shutdown and all of the uncertainty
around it, we're pretty sure there will be additional negative
impact on economic growth," in particular on consumer spending,
said Natalie Trunow, chief investment officer of equities at
Calvert Investment Management, which has about $13 billion in
She said the market could see more losses in the short run.
"We are in a good place in year-to-date returns, so it makes it
easy for investors to take some profits off the table and step
back and watch this unfold." The S&P 500 is up 18.5 percent
since the end of 2012.
Making matters worse, the shutdown has meant the delay of
the release of key government data, like the U.S. monthly jobs
report, which was scheduled to come out on Friday.
That has left investors to make decisions without crucial
data to guide them and made it more difficult for them to gauge
what may happen to the Fed's monetary policy.
This week, data from independent providers including the
Thomson Reuters/University of Michigan survey of consumer
sentiment are still expected, in addition to minutes from the
last Fed meeting.
Also, investors will see the first of third-quarter earnings
from top S&P 500 companies in the coming week, including results
from JPMorgan Chase and Wells Fargo.
The forecast for third-quarter earnings has come down
sharply in recent weeks - growth now is expected at just 4.5
percent - but financials are expected to lead S&P 500 profit
growth for the quarter, with a gain of 9.5 percent, according to
Thomson Reuters data.
Results from Alcoa are due this week as well.
While the VIX is still low by historical standards and
compared with what it was in 2011 during another debt ceiling
debate, it appears likely to drift higher from here, according
to Randy Frederick, managing director of active trading and
derivatives for Charles Schwab in Austin, Texas.
"I would say the upside maximum is the high 20s, close to
30," he said. The VIX traded as high as 48 in the summer of
Technically, investors have also been eyeing a significant
break below the 50-day moving average on the S&P 500 as a sign
of more weakness. The index closed below that level on Thursday
but rebounded to trade modestly above it on Friday. The moving
average was at about 1,679 on Friday.
If that breaks, "1,630 would be the next hard stop,"