Why debt-ceiling deal didn't give stock markets a bigger boost

One of the major reasons Congress and the president felt compelled to reach a deal on the debt ceiling was a fear that the financial markets would falter if the US defaulted on its debt.

On Monday, the stock market greeted the news of the debt compromise with a rise that lasted eight minutes. Then, the economic realities intruded with some data indicating that July may have been yet another month of little growth.

Almost immediately, the US dollar fell compared to such currencies as the Swiss franc and the yen. And, the stock market swooned as well.

The Dow Jones Industrial Average, which opened at 12,144, initially rose to 12,282 before slumping at midday to 11,998. A midafternoon rally cut most of those losses, lifting the Dow to 12,115, off 28 shortly after 3:15 p.m.

The drop in the Dow follows a loss of about 500 points over the past week – the largest loss in more than a year – as investors worried that the Republicans and Democrats would be unable to compromise, resulting in a default by the US government.

Once a tentative deal was announced, some traders said they were relieved – at least for the moment.

“I would say that something is better than nothing,” says Eric Stein, vice president and portfolio manager at Eaton Vance Investment Managers in Boston. “The combined cuts in the deficit of about $2.5 trillion over ten years is a small step in the right direction,” he says. “But, it’s not a panacea by any stretch of the imagination.”

Some investors in fact never had any doubt the politicians would reach an agreement of some sort. “The financial markets always knew there would be no default on the debt,” says Lance Roberts, an economist with the firm Streettalk Advisors, based in Houston. “If they had been worried, interest rates would be north of 4 percent, probably closer to 5 percent, and the market would have been down 15 percent.”

Of greater concern is the economy, says Mr. Roberts whose own economic indicators suggest the US will be in a recession again early in 2012. “Everything is deteriorating,” he says.

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