March 1, 2021

Wall Street Holds Its Breath During Debt Talks

“Congress is often referred to as a reactive force rather than a proactive one,” said Tobias Levkovich, chief United States equity strategist at Citigroup. “If we had a 500-point drop in the Dow, it would scare that reactive body.”

With negotiations to cut the deficit and raise the debt ceiling deadlocked on Capitol Hill, the Dow Jones industrial average sank nearly 100 points Friday, closing at 12,143.31. Investors expressed their displeasure with both the political stalemate and new economic data that showed the economy grew at a slower-than-expected pace in the second quarter.

The Standard Poor’s 500-stock index was down 3.9 percent this week, the biggest weekly drop in more than a year.

The last time Washington surprised investors and failed to act was on Sept. 29, 2008. Then, lawmakers rejected the TARP legislation to bail out the banking system at the height of the financial crisis after the collapse of Lehman Brothers, and investors sent the Dow plunging by 778 points.

Congress quickly reversed course, and by Oct. 3, both the Senate and the House had approved the legislation. But the damage had been done — that 778-point drop wiped out $1 trillion in shareholder value. And with investors unnerved, the stage had been set for more big drops. The Dow fell 936 points on Oct. 13 and another 889 points on Oct. 28.

“In sum, Washington grumbles, Wall Street stumbles,” said Sam Stovall, chief investment strategist for Standard Poor’s equity research in New York. “Once again, history repeats itself.”

So far, Wall Street isn’t yet in panic mode, Mr. Levkovich said Friday, with most investors still counting on a resolution to the logjam, averting a default. But, he said, “the level of complacency is eroding. I suspect there will be a lot of frantic calls going around this weekend.”

Indeed, within Wall Street’s biggest firms, worries are growing about what inaction will mean for the market.

Many in the business community are concerned that Congress won’t be able to act before the Tuesday deadline, said Robert Nichols, chief executive of the Financial Services Forum, a lobbying group in Washington that represents many of the biggest commercial and investment banks. “We have strongly urged policy makers to reach an agreement this week so we don’t have to learn the grave consequences of inaction.”

David Joy, chief market strategist for Ameriprise, said on Thursday that he still thought a deal would get done by Tuesday. “If we don’t, I would expect there to be an immediate adverse reaction in capital markets, similar perhaps to what happened in TARP.”

The steeper the move, he said, the stronger the message, suggesting that a 5 percent drop — about 600 points on the Dow — would be a wake-up call for Washington.

Investors were also rattled Friday morning by new figures from the Commerce Department that showed an economy on the verge of a stall. The country’s gross domestic product grew just 1.3 percent in the second quarter, while government statisticians revised downward their estimate for first-quarter growth to 0.4 percent, from an earlier estimate of 1.9 percent.

Arvind Sanger, managing partner at the hedge fund GeoSphere Capital Management, said he had reduced his exposure to stocks in the last two days, fearing the market could plunge if the debt issue remained unresolved.

“That’s something that I haven’t seen yet, but I have 2008 fresh enough in my mind that I’m taking it down anyways,” he said.

Despite the standoff in Washington and worries about how a default or a credit rating downgrade might affect the markets, Treasury bonds rallied. The yield on the benchmark 10-year bond was lower by 13 basis points, at 2.82 percent just after 3 p.m.

“Why in the midst of all this would the 10-year yield be that low?” asked Quincy Krosby, a market strategist for Prudential Financial, adding: “Growth is slow, and it moved down even more in the midst of this Washington politicking.”

The view in the market, she said, is that the debt situation “is going to add to growth concerns if this doesn’t get fixed in a timely, orderly fashion.”

Azam Ahmed and Patrick Scott contributed reporting.

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