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Stocks sink as government heads toward shutdown
NEW YORK (AP) — Stocks sank Monday as Wall Street worried that a budget fight in Washington could lead to something far worse for the economy — a failure to raise the nation’s borrowing limit.
The Dow Jones industrial average was down 91 points, or 0.6 percent, to 15,167 as of 2:55 p.m. EDT. The Standard & Poor’s 500 slid 6 points, or 0.4 percent, to 1,685, and the Nasdaq composite dropped 3 points, or 0.1 percent, to 3,778.
There is a simple reason why the budget battle — and, more importantly, the fight over the debt ceiling — are so crucial: The credit of the United States is the bedrock upon which nearly every other investment is built, due largely to the assumption that the nation always will pay its debts.
“The concern is government has become so polarized that if they cannot pass (a budget), there’s a greater chance that the debt ceiling battle will go to the brink or possibly lead to a default,” said Alec Young, global equity strategist with S&P Capital IQ.
Monday’s decline adds to what has been eventful September for investors. Stocks hit an all-time on Sept. 18 after the Federal Reserve voted to keep up its economic stimulus program. But that enthusiasm vanished as Wall Street began to worry that the political bickering between the parties would lead to a government shutdown and crisis over the debt ceiling.
Investors are likely to see one of those worries come to pass.
On Monday, a partial government shutdown appeared imminent. Congress and the White House were no closer to a deal on funding federal spending. The U.S. Senate voted Monday afternoon to table the House of Representatives’ temporary budget bill.
If no deal is reached by midnight on Tuesday, the federal government will partially shut down for the first time in 17 years.
A shutdown lasting two weeks could slice 0.3 percentage points off U.S. gross domestic product, according to a report by Macroeconomic Advisers. That is due to hundreds of thousands of federal workers going without a paycheck. Although in previous government shutdowns Congress passed legislation to provide retroactive pay to federal workers, restoring that growth to U.S GDP, that move is not certain this time.
Some investors think a shutdown may be a positive event in the long term. The political pressure of a shutdown could force politicians to get down to business and negotiate — particularly on the issue of the debt ceiling.
“This may be good thing in the long run because it may lead to compromise,” said J.J. Kinahan, chief strategist at TD Ameritrade.
Treasury Secretary Jack Lew said last week that the government would run out of borrowing authority by roughly Oct. 17. The last time the debt ceiling issue came up, in August 2011, it led to Standard & Poor’s downgrading the United States’ credit rating, and the Dow Jones industrial average went through nearly three weeks of nauseating triple-digits moves almost daily.
The benchmark U.S. 10-year Treasury note is used to value mortgages, corporate bonds and even stock dividends. If domestic and foreign investors begin to question whether the U.S. will pay its debts, it could throw every other investment out of alignment.
Despite the worries about what’s going on in Washington, the S&P 500 is on pace to end the month up 3.6 percent.
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