Stock Market Keeps Heading Lower (SPX, DIA, QQQ)

by Business Insider | October 8, 2013 2:50 pm

Stock Market Keeps Heading Lower (SPX, DIA, QQQ)

We are now on day 8 of the government shutdown, and the stock market continues to fall.

Today, the S&P 500 is down 0.4%, trading at 1669.

On September 19, the index hit an all-time high of 1729. Since then, the fiscal crisis in Washington, D.C. has been weighing steadily on stocks.

In a note to clients, BofA Merrill Lynch equity strategist Savita Subramanian offers some thoughts on the market:

Week 2 of the shutdown and looming debt ceiling deadline

The ongoing government shutdown forces us to assess (1) its impact on the economy and corporate profits, and (2) the increasing risk that politicians are unable to agree on a deal to raise the debt ceiling. In our view, the latter is the bigger concern for equities.

The impact of the government shutdown should be modest

Our economists currently assume that the shutdown lasts for two weeks and subtracts 0.5ppt from 4Q GDP growth. We would not expect a significant sell-off in stocks under this scenario. For one, there would likely be an offsetting bounce back of growth in 1Q of about 0.3ppt. Also, we estimate that 8-10% of the S&P 500’s revenues are derived from government spending, of which we estimate that roughly 60% is from federal sources. Thus, two weeks of lost federal government revenues would only equate to about 0.2% of total annual sales. The actual impact could also be even lower because Medicare/Medicaid are still up and running, and the Pentagon has recently ordered the recall of most of the Defense Department’s some 400k furloughed civilian workers.

Do we need a sell-off to force a quicker resolution?

While some have suggested that it may take a market sell-off to get a deal in Washington, this has not been the case historically. In fact, the S&P 500 actually rose during the last government shutdown in 1995, which was the longest in US history (21 days). The rest of the shutdowns since 1981 were resolved in less than five days without so much as a 3% pullback in stocks. In general, average S&P 500 returns have been flat to positive in the month preceding a shutdown (+0.1%), during the shutdown (0.0%) and the month following a shutdown (+2.5%). See Table 3 inside.

The bigger risk would be a failure to raise the debt ceiling

If we do not get a resolution by late October, it becomes increasingly likely that the government will run out of cash and fail to meet its payment obligations. This could result in another US sovereign credit rating downgrade. When the US was originally downgraded in 2011, the S&P 500 closed down 7% the next trading day, compounding the sell-off that was already underway as the result of the European financial crisis.

Miller Tabak chief technical market analyst Jonathan Krinsky says the S&P 500 is at a “critical juncture”[1] at these levels.

Yesterday, Société Générale put out a big, out-of-consensus call[2] predicting that the index would suffer a 15% correction in the first quarter of 2014, and then struggle for years to get back to today’s levels.

See Also:

Endnotes:
  1. says the S&P 500 is at a “critical juncture”: http://www.businessinsider.com/the-sp-500-is-at-a-critical-juncture-2013-10?utm_source=investorplace&utm_medium=referral
  2. put out a big, out-of-consensus call: http://www.businessinsider.com/societe-generale-bearish-on-us-stocks-2013-10?utm_source=investorplace&utm_medium=referral
  3. Stocks Are Getting Crushed, Bonds Flying Higher: http://www.businessinsider.com/stocks-falling-bonds-rising-after-ism-2013-10?utm_source=investorplace&utm_medium=referral
  4. Markets Are Up In Europe As Day 3 Of The Shutdown Begins: http://www.businessinsider.com/european-markets-october-3-2013-2013-10?utm_source=investorplace&utm_medium=referral
  5. The Stock Market Is Making A Big Comeback: http://www.businessinsider.com/stock-market-comeback-2013-10?utm_source=investorplace&utm_medium=referral

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