Wall Street, wary but expectant, awaits debt ceiling deal from D.C.
The markets are counting on Washington to raise national debt ceiling by Aug. 2, but that's not all. Wall Street also expects a deal that cuts the size of US budget deficit. How much is it looking for?
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While the debt ceiling negotiations continue in Washington, many Wall Street money managers simply don’t believe that Uncle Sam will not meet his obligations. Yes, the dragged-out drama may produce some sweaty palms in America's financial capital and stocks may have moments of weakness – as they did Friday, when a skittish Dow Jones Industrial Average was down about 30 points at midafternoon. But the notion that the US Treasury would not pay its bills after Aug. 2 is almost inconceivable to Wall Street.
In Congress, “they may go to the 11th hour, 59th minute, 59th second, and they probably will, because that is the way the system works,” says David Kotok, chairman of the money management firm Cumberland Advisors in Vineland, N.J. “But we are not going to have government default.”
The “no default” crowd is the “consensus view” among financial movers and shakers, says Pete Davis, who advises Wall Street firms on the ins and outs of Washington politics. However, he says, “When you talk about all the details [of a prospective debt-deficit deal] – which are pretty problematic, unresolved, and contradictory – it becomes a lot less clear.”
The details may be unclear, but many money managers say they can predict how it will all turn out.
Typical is Jeffrey Kleintop, chief market strategist at LPL Financial in Boston. His firm’s “base case” is for the Congress and President Obama to agree to reduce the US budget deficit by $1 trillion to $2 trillion over the next 10 years, says Mr. Kleintop. “They don’t address entitlements or any tax increases but kick those down the road to the next election.”
Congress and Mr. Obama can’t kick the can down the road too far because on Thursday Standard & Poor’s, the debt rating agency, said it will lower the US government’s AAA rating unless lawmakers, in addition to simply raising the debt ceiling, make a “credible” effort to reduce the size of the US budget deficit. S&P says the odds of the US getting its top-rank rating lowered are 50-50. Any reduction in the US government’s debt rating would be expensive: Mr. Davis estimates it would cost taxpayers about $64 billion more a year in interest payments.