Stocks hang in balance as congressional supercommittee deals

NEW YORK -- Political risk is back in the spotlight on Wall Street as wary investors wait to see if the congressional supercommittee formed to find ways to slash the USA's bulging deficit can get a deal done before its fast-approaching deadline.

The committee has until Wednesday to propose a mix of spending cuts and tax increases that would trim the nation's $15 trillion in debt by $1.2 trillion over the next decade. While both Republicans and Democrats have put forth plans, signs of stalemate are rising. The possibility of lawmakers not being able to compromise and find the needed cuts can't be ruled out.

The brinkmanship has put investors, already jittery over the debt crisis in Europe, on alert. Wall Street learned in August that political stalemates related to deficits can cause markets to gyrate wildly. The chaos caused by the political fight over raising the debt ceiling in late July and early August caused the Dow Jones industrials to plunge more than 2,000 points, or 16%, in a two-week span. The logjam was also cited by rating agency Standard & Poor's as a key reason it lowered the USA's triple-A credit rating.

The good news? Wall Street has low expectations now, and stocks are unlikely to suffer a drop as they did in August if politicians don't get anything done. Also, if the supercommittee fails, automatic cuts of $1.2 trillion will kick in as part of the 2013 budget, says Kate Warne, chief investment strategist at Edward Jones.

The economy is also perceived to be in better shape now than in the summer, when fears of a double-dip were high and the threat of the U.S. government defaulting on its debts was real.

Warne says if the supercommittee does come to an agreement, it won't come close to the "Go Big" plan, or $4 trillion in cuts, that a bipartisan group of Republican and Democratic members of Congress has been pushing for in recent days.

"Our expectation is that they will come up with a modest proposal that is close to, or right around, the $1.2 trillion minimum required," Warne says.

While the bar is set low, there are downside risks, says David Joy, chief market strategist at Ameriprise Financial. If the supercommittee disappoints, it could lead rating agencies to downgrade the USA's credit rating further, which could spook investors and hurt confidence.

A bullish scenario would be a plan that outlines cuts around $4 trillion, says Mark Luschini, strategist at Janney Montgomery Scott. "The markets would welcome the effort to get our fiscal house in order and in a bipartisan way," Luschini says.