Stocks are likely to face more selling pressure next week as the Tuesday deadline draws near for raising the U.S. debt ceiling and Washington remains paralyzed by political brinkmanship.
Anxiety over the debt crisis sent the S&P 500 lower for five straight days, resulting in the worst week and month for the benchmark index since August. The CBOE Volatility index, Wall Street’s “fear index,” rose more than 40 percent for the week, its biggest jump since early May.
With four days before the United States loses its ability to borrow, U.S. President Barack Obama on Friday told Republicans and Democrats to stop bickering and find a way “out of this mess.
“Right now, overall the market is being totally driven by the debt situation, whether it is in Europe or the U.S.,” said Rick Bensignor, chief market strategist at Dahlman Rose in New York.
The deadline for raising the U.S. debt ceiling has investors on edge. Volatility, currently at its highest since the earthquake in Japan, can be expected to increase as time runs out.
“You’ve got individual stocks that can make significant moves but the market itself collectively is being pushed and pulled by every headline and how the wind is blowing out of Washington at any given moment.”
The recent slide has also put stocks in a precarious position from a technical perspective as the S&P 500 index moves closer to its 200-day moving average, a level which could bring about additional selling if the index breaks below it.
The benchmark index successfully bounced off the level on Friday after the early morning decline.
“That is the line in the sand that really divides things going maybe bad -- to things really turning bad,” said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
“If we take that out next week -- man, I’m not neutral, I’m short.”
Even if a deal is struck, the possibility remains the United States could lose its prized triple-A credit rating if the terms are not stringent enough to satisfy credit rating agencies.
You are definitely going to get the downgrade by S&P,” said Ken Polcari, managing director at ICAP Equities in New York.
“You are still waiting on what the ultimate deal is going to be and it’s just not going to be what everybody expects, so you are going to see disappointment in the markets.”
Investors can still find some solace in corporate earnings. According to Thomson Reuters data through Friday, of the 327 S&P 500 companies that have posted earnings, 73 percent have reported results higher than analysts’ expectations.
Companies expected to report earnings next week include Kraft Foods Inc, Clorox Co, Pfizer Inc and Prudential Financial Inc.
“Individual stocks, especially after earnings are trading on their own accord and you are seeing moves of 5 to 10 percent sometimes after earnings come out,” said Bensignor.
But added pressure is coming from economic data, with the latest revision of gross domestic product showing the U.S. economy stumbled badly in the first half of 2011 and came close to contracting in the January-March period.
The flagging data offers little hope next week’s data -- including July’s employment report -- can turn the tide of the pressure.
“I don’t think the market is pricing in very much for the possibility we don’t get a debt deal done, given how bad the economic data has been,” said Michael Marrale, managing director and head of sales trading at RBC Capital Markets in New York.
“Put it this way, putting all the debt deal concerns aside, the market would probably be here anyway.”
As investors asses the debt ceiling debate, slowing economic data and corporate earnings, they must remain prepared for any developments from the simmering debt crisis in the euro zone, which could further heighten investor angst.
There are two things I keep my eye on -- one on Washington and one on Brussels, because between the two of them you never know which headline risk is going to hit you over the head next,” said Mendelsohn.