Debt Fallout: Even Market Pros Don't Know What to Do
Market pros—both young and old—see this week’s debt-ceiling talks as the culmination of a year-long string of uncertainties that has left many of them the most confused they've ever been.
“There has never been a period in our experience where there have been so many factors, inputs and issues directly and indirectly affecting the stock market,” said Laszlo Birinyi, the legendary trader at Salomon Brothers through the 1970s and 80s who now runs his own research firm, in a note. “Many of them are, frankly, beyond our capabilities and competence.”
Along with the debt debate, right now traders are dealing with the still-flaring Euro debt crisis, the end of one of the most extraordinary monetary stimulus plans ever under taken by the Federal Reserve, a potential ‘hard landing’ in China, troubles with municipal bond financing and a still stumbling U.S. housing market.
Add to that list the financial and health reform bills that have been passed, but yet to be implemented. And, of course, whatever fiscal restraints come out of the complicated deficit reduction agreement that could be hatched this weekend as part of the debt compromise.
“While we do not appear to be making the sharp policy mistakes of the 1930s, we do appear to have some longer-term drags—the potential for debt downgrades and the need to ‘write the rules’ still on financial regulation and the Healthcare bill,” said Don Rissmiller, chief economist for Strategas research and one time economist at the Federal Reserve Bank of New York. “While these modern-day drags may not alone result in a sharp cyclical downturn, they create an environment of perpetual headwinds where the economy remains vulnerable.”
Lloyd Blankfein of Goldman Sachs and Jamie Dimon of JPMorgan Chase , both thought to be almost unflappable during the financial crisis three years ago, sent a letter Thursday, along with other Wall Street CEOs, to the President and Congress begging them to take action “this week” on the debt ceiling.
Meanwhile, spreads on bonds for Greece and Italy have widened back out this week as if the second bailout of Greece agreed upon earlier this month never took place. Not to mention, it is the heart of quarterly earnings season.
“It’s almost as if investors are having to invest with one eye open as they look around each corner, hoping not to be hit with a new ‘headwind,’” said Brian Sozzi, an analyst with Wall Street Strategies. “What has been happening for the past year is something generally not taught in books.”
Until recently, the market had been taking it in stride. The S&P 500 plunged 2 percent on Wednesday, its third daily loss in a row. The benchmark is now frozen near a one-month low. Still, the index is only four percent from its bull-market high hit in April.
Gold , often a gauge of macroeconomic fear, is at fresh record levels.
“The more economic headwinds that we face, the more the Fed will be inclined to increase accommodation and liquidity,” said Jim Iuorio of TJM Institutional Services. “The obvious problem here is that we are in the same ‘bubble-bust-repeat’ cycle that began in the early 1990s, so the trick, in investing, becomes identifying where the bubbles exist.”
Traders should take heart though. They are not the only ones with high-stress jobs facing confusing times. So are air-traffic controllers. The FAA has been shut down for six days and won’t be able to restart unless a debt agreement is reached or a special bill is passed.
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