Market Insider

Stocks May See Sluggish Performance After Potential Debt Deal: Strategist

Broker works the trading floor at the New York Stock Exchange.

If a history is a guide, the stock market is likely to see just small gains in the months following any debt ceiling increase.

Politicians are haggling over the details, but the markets are convinced a deal to raise the debt ceiling will come at the last possible minute, along with some sort of deficit reduction plan.

"We still believe the discord represents high drama, and low risk, but acknowledge that the thought of the unthinkable may cause investors to do the unfortunate by selling stock and putting additional pressure on equity prices," writes Sam Stovall, chief investment strategist at Standard & Poor's Equity Research.

Stocks fell Monday but were off their lows in late morning. The Dow was off by double digits after an earlier triple-digit loss.

Stovall notes that Congress raised the debt ceiling 53 times since President Nixon took office in 1969. In the one-month period and three-month period following these moves, the Standard & Poor's 500 rose by less than it typically did in one- or three-month periods over the same years. The S&P rose a median 0.6 percent in the month after the debt ceiling was raised, compared to a median gain of 0.9 percent, he wrote.

Three months later, the market saw a median gain of 0.9 percent, compared to a median 2.2 percent increase for all quarters going back to 1969.

"This could be a perfect example of fooled by randomness," Stovall said in an interview. "There's no guarantee that this is not a correlation without causation...such as the 'Super Bowl theory'" that links the National Football League championship game with stock market performance.

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