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Impasse over US debt limit sends stocks lower

The Dow closed about 88 points down, the S&P 500 lost about 7 points, and the Nasdaq fell about 16 points

By Chip CutterAssociated Press / July 25, 2011

In this July 22, 2011 photo, Joseph Mastrolia, a trader for Barclays Capital, monitors stock information at his booth on the floor of the New York Stock Exchange. Global stocks started the week on a flat note Monday, July 25, 2011 as investors waited to see if U.S. political leaders can reach a deal to raise Washington's debt limit and avoid a default that would send shock waves through the global economy and financial markets.

Bebeto Matthews / AP

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NEW YORK (AP) — The debt showdown in Washington is rattling the stock market again.

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Stocks fell Monday after Republican and Democratic leaders offered competing proposals to avoid a catastrophic default on the U.S. government's debt.

Lawmakers hoped to reach a compromise on raising the country's borrowing limit late Sunday, but those talks stalled. President Barack Obama wants to raise revenues by letting tax cuts for wealthy Americans expire. Republicans have pushed for more spending cuts and have rejected higher taxes.

If an agreement is not reached by Aug. 2, the U.S. won't have enough cash to pay all its bills. That could have a huge impact on financial markets. The U.S. would likely lose its coveted triple-A credit rating. Interest rates would rise for millions of consumers. And stocks could fall the way they did during the 2008 financial crisis, analysts say.

Most traders expect the White House and Capitol Hill to come up with a last-minute deal. Yet there are still uncertainties about higher taxes or changes to government spending that could affect corporate profits. Investors also worry that the government may only come up with a short-term fix that could still trigger a credit rating downgrade.

"We're thinking this is going to be resolved," said Rob Lutts, president and chief investment officer of Cabot Money Management. "The question: Is it resolved from a standpoint of a long-term solution or a stop-gap measure?"

The Dow Jones industrial average fell 88.36 points, or 0.7 percent, to close at 12,592.80. The Dow had been down as many as 145 points earlier.

The Standard & Poor's 500 index fell 7.59, or 0.6 percent, to 1,337.43. The Nasdaq composite index fell 16.03, or 0.6 percent, to 2,842.80.

Stock trading has varied widely in July because of concerns over debt problems in the U.S. and Europe. Prior to Monday, the Dow had alternated between gains and losses over the previous nine days. The VIX, a measure of volatility in U.S. stock prices, has risen 16 percent in July.

Many investors are reluctant to buy stocks because of concerns over the budget impasse in Washington. Trading volume, or the number of shares bought and sold on a given day, has fallen 22 percent in July on the New York Stock Exchange compared with the same month a year ago, according to FactSet. If that continues, July will have the lowest average daily volume since December 2007.

Some investors have turned to gold and other precious metals as a place to park money while the U.S. and European debt problems get sorted out. Gold rose $10.70 to $1,612.20 an ounce Monday, while silver rose 24 cents to $40.36 an ounce. Gold has risen 14 percent this year, while silver is up 31 percent.

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