Debt 'super committee': the Grinch that stole the Christmas stock rally
The apparent inability of the 'super committee' to reach a deal, along with European economic woes, is causing angst on Wall Street. The Dow is down 300 points.
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“It’s not a question of if but a question of when S&P downgrades France,” says Anthony Valeri, market strategist for LPL Financial in Los Angeles. “In all reality back in August there was more cause to downgrade France than the US because its debt to GDP [ratio] is worse than [that of] the US.”Skip to next paragraph
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Concern over the twin debt problems in the US and Europe is so strong that investors are even ignoring some signs the US economy is improving somewhat. On Monday, the National Association of Realtors reported existing home sales in October were up 1.4 percent – better than expected by Wall Street economists. However, home prices fell 4.7 percent year over year.
“The economic data was pretty good and it did not have any impact at all,” says Mr. Valeri. “The market just ignored it.”
If the super committee is unable to reach agreement by the end of Monday, the law provides for automatic cuts in the federal budget starting in January 2013. However, many on Wall Street doubt this will actually happen.
“Congress is the one that enacted the penalty, and they can absolve themselves of the penalty,” says Mr. Stovall. “They still have 13-1/2 months to find a way out of this.”
If Congress can’t find a solution, the possible cuts are of concern to investors because they might imply slower growth in the US economy.
Across-the-board cuts starting in 2013 would reduce growth prospects, writes the brokerage house Canaccord in an analysis on Monday. The Vancouver-based firm expects the prospect of a steep cut in defense spending will spur Republicans to look for some kind of a deal while Democrats could be moved to act to prevent automatic cuts to Medicare.
Investors will be watching the debate closely with important ramifications for stock portfolios. “With the advent of instantaneous news, now everyone is supersensitive – any time there is any bad news, the markets are reacting instantly,” says Frank Fantozzi, president of Planned Financial Services in Cleveland. “It’s amazing the amount of 2 percent to 3 percent swings in the averages.”
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