Actionable insights straight to your inbox

Equities logo

Has the Stock Market Discounted Default?

Not raising the debt ceiling (default on certain obligations) would have disastrous consequences.Until Friday, the stock market had been telling us NOT to worry, it’ll happen in one form or

Not raising the debt ceiling (default on certain obligations) would have disastrous consequences.

Until Friday, the stock market had been telling us NOT to worry, it’ll happen in one form or another.

Common sense tells us, Congress would not do irreparable harm to its own country, so why expect a worst case scenario?

Is Wall Street willing to take that chance ?

Brooksie’s Daily Stock Market blog
-an edge before the market opens

Monday, July 18, 2011 9:24 am EDT

DJIA: 12,479.73
S&P 500: 1215.14
Nasdaq Comp.: 2789.80
Russell 2000: 828.7

Today’s weakness prior to the open may indicate the Street is having second thoughts, and with politics as divisive as they are now, who could blame them ?

What’s my point ?

The stock market may have to drop to a level that fully discounts the uncertainty of this situation.

Its rate of decline will be determined by progress (real or perceived) in reaching an accord on raising the debt ceiling and some kind of framework for reducing the nation’s debt going forward.

A proposal will be presented this week by Republicans for a Constitutional Amendment to balance the budget, but they are expected to be short on “how to” achieve that, ergo it will go nowhere.

This will add to angst and uncertainty and depress stock prices further.

I am surprised the stock market has held up this well to-date.

The stock market has a great track record for anticipating turning points, turning down before ugly news as it did in October 2007 and up prior to a rebound in the economy in early March 2009.

Its weakness starting on May 2 was partially driven by profit taking after a healthy 8-month surge, but also in anticipation of a slowing economic expansion, European sovereign debt issues and a debate in Congress over reducing the rising national debt and raising the debt ceiling.

So, there are other factors contributing to the current weakness.

Even so, the raising of the debt ceiling to avert default is the big one.

Weeks ago, I set a target for the decline starting on May 2 at DJIA 10,700 – 10,830 (S&P 500: 1150)

I still hold to that UNLESS Congress throws the country into default.

Under those conditions, I expect a decline on the order of 1,400 – 1,900 Dow points following the announcement.

I still believe Congress will find a way to avoid default PRIMARILY BECAUSE IT IS AVOIDABLE, i.e. if Congress fails to raise the debt ceiling throwing the country into default it will be because it chooses to do so, and I can’t believe elected officials would do that, not with the disastrous consequences that are projected to result.

Expect the stock market to decline as it probes for a comfort level, but also expect that decline to provide an opportunity to buy.

Recent Headlines :
“Is the Fix In” ? (June 16 – DJIA: 11,897)
“Quadruple Witching Friday –Buying Open Risky” (June 17 DJIA 11,961)
“Ugly ! Nevertheless, the Outlook Can Change Quickly” (June 20 – DJIA 12,004)
“No Time For Napping” – (June 21 DJIA: 12,080)
“No Hope in Sight ? Don’t Bet on IT ! Prepare for Opportunity” – (June 22, DJIA: 12,190)
“Countdown to Opportunity – Start Preparing !” – (June 23 DJIA 12,109)
“ BIG Money Nibbling – Stocks Beginning to Look Attractive – Negatives can Vanish” (June 24 DJIA:
“Institutions Showing Interest – Not Reaching Yet” (June 27 DJIA: 11,934)
“Will Q2 Earnings Reports and Congressional Action on Debt Ceiling” (June 28 DJIA 12,043)
“ Don’t Buy News on Greek Vote – Spike to Be Short-Lived” (June 29 DJIA: 12,188)
“Again: Debt Ceiling Approval and Q2 Earnings Catalysts” (June 30 DJIA: 12,261)
“Enjoy the Fourth ! Prepare for Fireworks in Weeks Following” (July 1 DJIA: 12,414)
“Did Someone Blink ?” (July 5 DJIA 12,582)
“A Pause is Needed Here to Digest Recent Gains, Q2 Earnings Ready to Take Center Stage” (July 6
DJIA 12,569
“Whoa !” (July 8, DJIA: 12,719.49)
“July Could Be a Pivotal Month” (July 11, 2011, DJIA: 12,657
“Watch This One Closely – Very Closely” (July 12, 2011 – DJIA: 12,505)
“Default is Un-American” ( July 14, 2011 – DJIA: 12,491.11 )
“Breakthrough This Weekend ? – a Risky Bet ( July 15 – DJIA:12,479)

George Brooks
[email protected]
The writer of Brooksie’s Daily Stock Market blog, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk

A weekly five-point roundup of critical events in the energy transition and the implications of climate change for business and finance.