Stocks Close Lower as Supercommitee Fails

Nov. 21, 2011 — -- Stocks declined on Monday over two percent following reports that the Congressional Joint Select Committee, or supercommittee, have failed to reach an agreement on spending cuts and tax increases to trim the deficit by the deadline of Nov. 23.

The co-chairs of the supercommittee announced Monday afternoon that it will disband after failing to reach an agreement.

At the end of trading, the Dow Jones industrial average dropped over 248 points, or 2.1 percent, to 11,547 and the Nasdaq was down 1.9 percent to 2,523.

In addition to the European debt crisis, investors are concerned that the failure to reach an agreement may lead to another credit downgrade for US bonds and thus higher borrowing costs for the government.

Without a deficit reduction agreement, $1.2 trillion in "sequester caps," or automatic cuts, will be implemented. The cuts will affect a range of programs from Medicare and Medicaid to the Pentagon.

Eugene Stone, PNC chief investment strategist, said though investors had "low expectations" for the supercommittee, its likely failure is adding to the woes in the market.

Stone said investors already know how they stand on the 2012 election, which they believe will have a greater influence on the management of the deficit than the super committee.

"That's part of the reason why we won't likely come to a deal. We'll make it an election issue. Some of these decisions come down to underlying philosophies," he said.

Stone said a stronger driver for financial markets is concern over the debt crisis on the other side of the Atlantic -- in the euro zone.

Back in the U.S., investors expressed concern that Congress' inability to lower U.S. debt and improve the country's credit standing could harm the economy -- reminiscent of the summer showdown in Congress. In August, in order to avoid a default on the country's debt, Congress designated the 12-member supercommittee to shave $1.2 trillion from the deficit.

Despite that decision, that week credit ratings agency, Standard & Poor's, downgraded U.S. sovereign debt on Aug. 5, expressing concern over the long-term U.S. economic outlook related to its debt.

Stone said it was unlikely Standard & Poor's or the other rating agencies, Moody's and Fitch, will downgrade the U.S. debt anytime soon.

Tobias Levkovich, a Citigroup analyst, said the supercommittee's inability to overcome the partisan divide does not imply nothing can be done in Washington.

"One should expect some movement on the payroll tax cut extension and probably some unemployment benefits expansion as both parties prefer to avoid going into an election year with the inability to deliver something to key constituents," he wrote in a research note on Monday. "A perceived tax hike or benefits cut will not go down well with key constituents and that most likely will propel congressional momentum and a willingness to compromise."

He said the bigger issue of controlling the deficit will more likely wait for the 2012 election outcome, as both President Obama "and his challenger will lay out plans for dealing with the budget deficit and the American people will have to decide which plan they consider less offensive in terms of tax hikes and spending cuts."

Levkovich said hopes for the committee's success were muted since the membership was announced months ago. Regardless, he said the markets showed disappointment.

"Indeed, at the time, there were reports that the membership was comprised of legislators that had not shown willingness to cross party lines in the past," he wrote.

In a small survey of 128 respondents, Citigroup found 71 percent of investors believe the supercommittee will result in a "partial success," while 15 percent believe the super committee will be fully successful at reaching $1.5 trillion in savings. Thirteen percent believe the supercommittee will fail outright, according to the survey, the results of which were reported Nov. 16.

If the supercommittee results in a "partial success," 24.2 percent of respondents believe the S&P stock index will be flat in its immediate response, while 21.1 percent believe it will be 1 to 2 percent lower.