Stocks to see more volatility from shutdown

Fri Oct 4, 2013 6:51pm EDT
 
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By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. stocks are likely to face another week of rising turbulence as efforts to settle the budget dispute in Washington drag on, leaving investors worried about the more critical issue of raising the U.S. debt ceiling.

The budget impasse has led to a partial U.S. government shutdown for the past four days, already longer than many investors had expected.

While stocks ended higher on Friday, the S&P 500 posted a loss for the week and the CBOE Volatility index .VIX - the market's fear index - rose to 16.89, up from 13.12 on September 20. The index is still at relatively low levels, but options-market trading suggests investors are starting to guard against increased volatility.

The larger issue for investors is that efforts to solve the budget problem could become entangled with the issue of raising the debt limit. If the $16.7 trillion borrowing cap is not increased, it could lead to a possible U.S. default.

"It's not likely, but it's certainly a remote possibility. That is the big fear, because that's an event that has not been discounted by the market," said Quincy Krosby, market strategist at Prudential Financial in Hartford, Connecticut. "And it's not just a domestic event; it's a global event."

The Treasury has said the United States will exhaust its borrowing authority no later than October 17. Republican House Speaker John Boehner told his party colleagues he would work to avoid a U.S. debt default, according to reports, helping stocks on Friday. But there is little hard evidence that the stand-off is nearing a resolution.

The dilemma has stopped the market's climb that took it to a record close September 18, when the Federal Reserve decided against trimming its stimulus plan. The S&P 500 has lost 2 percent since that date.

The utilities sector, with its high-yielding dividend payers, has lost the most of any S&P 500 sector since the shutdown's start. However, real estate, consumer and professional services and capital goods have also suffered, according to Bespoke Investment Group.   Continued...

 
Traders work on the floor of the New York Stock Exchange, October 4, 2013. REUTERS/Brendan McDermid