Wall Street braces for volatility as shutdown seems likely

Sun Sep 29, 2013 6:09pm EDT
 
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By Ryan Vlastelica

NEW YORK (Reuters) - As a last-minute deal to resolve spending negotiations in Washington appeared less likely, U.S. stock investors braced for what had previously seemed remote: a shutdown of the U.S. government that could spark a major equity decline.

The House of Representatives early on Sunday voted for an emergency spending bill that includes a delay of President Barack Obama's signature healthcare reform law despite veto threats from the White House.

While a deal could be reached before the government's fiscal year ends at midnight on Monday, the unanimous passage of a bill to continue paying U.S. soldiers in the event the government runs out of money was viewed as a sign that there would be no agreement between Republicans, who hold a majority in the House, and the Democrats, who control the White House and Senate.

Among the consequences of no deal being reached are many government employees will be furloughed, and the Labor Department will not issue its monthly employment report scheduled for next Friday.

A shutdown is expected to have a major impact on markets, injecting massive amounts of uncertainty into all asset classes. If a deal is reached quickly, that might allow markets to recover, but a prolonged shutdown could have significant implications for economic growth and consumer confidence.

"A shutdown is just one domino; if it falls, it will cause a series of unknowns, and those unknowns are impossible to quantify," said Adam Sarhan, chief executive of Sarhan Capital in New York. "The immediate shock could be 200 Dow .DJI points, could be 1,000 Dow points. Those moves may be exaggerated at first, but if things aren't resolved quickly that could just be the start."

The S&P 500 .SPX is currently 0.7 percent above its 50-day moving average of 1,680.18, a level that has been serving as support, but the index is likely to break below it in the case of major uncertainty. The next key level is the index's 100-day average of 1,659.29, 1.9 percent below current levels.

Historically, Wall Street has managed to avoid steep downside during similar incidents. During the federal government shutdown from December 15, 1995, to January 6, 1996, the S&P 500 added 0.1 percent. During the November 13 to November 19, 1995, shutdown, the benchmark index rose 1.3 percent, according to data by Jason Goepfert, president of SentimenTrader.com.   Continued...

 
Traders work on the floor of the New York Stock Exchange shortly after the opening of markets in New York, September 4, 2013. REUTERS/Lucas Jackson