S&P 500 and the Nasdaq briefly go positive before falling back...why aren't we down more? Why did we rally at all? Traders are betting a deal will get done. President Obama said earlier that Democrats and Republicans are not far apart on an agreement to raise the debt ceiling.
"I'm long, Bob," one trader wrote near the bottom this morning. "People have to bet that these clowns get it done over the weekend...that is the massive odds on play," he said.
Another wrote: "Sorry, was too busy buying buying/covering everything in sight...I think something DOES get worked out over the weekend-- will be a last minute scramble...but concerns are overblown."
What will happen to equities if the debt ceiling is extended, but there is a credit rating downgrade? A majority of the traders I have spoken to believe that a downgrade of U.S. debt from at least one credit agency is coming because there will not be a strong enough agreement on cutting the deficit.
First, it's bigger than US Treasurys. A large number of AAA-rated securities would lose that rating. Standard and Poor's has said that in addition to a downgrade of US Treasurys, the debt of Fannie Mae, Freddie Mac, the Federal Home Loan Banks, the Federal Farm Credit System Banks and AAA-rated U.S. insurance groups might also be downgraded.
1) These investors want yield, so an obvious potential choice are stocks with safe (and relatively high) dividends.