Stocks plunge as debt reduction talks fail
NEW YORK -- In the latest sign that political dysfunction is morphing into a major liability for financial markets and the economy, Wall Street reacted harshly to the failure of a special Congressional panel to strike a deficit-cutting deal by dumping stocks and branding the so-called supercommittee as "kryptonite" and a "super failure."
In what amounts to a vote of no confidence in elected leaders' ability to get the nation's shaky finances in order, investors reacted harshly to the supercommittee's inability to compromise and come up with at least $1.2 trillion in budget savings in the next 10 years.
And while markets didn't have high hopes for a so-called Grand Deal, they seemed to be caught off guard by the supercommittee's complete failure.
"The expectations for the supercommittee were extremely low," says Bruce Bittles, chief investment strategist at R.W. Baird. "But obviously not low enough."
The Dow Jones industrial average tumbled 248.85 points, or 2.1%, to 11,547.31, putting it back into the red for the year for the first time in a month.
The Standard & Poor's 500 index dropped 22.67, or 1.9%, to 1192.98 and the Nasdaq composite index fell 49.36, or 1.9%, to 2523.14.
In an update to clients this morning, Andrew Busch, a public policy strategist at BMO Capital Markets, summed up the special panel's impact on markets this way: "Super Committee Kryptonite." Kryptonite, of course, is the fictional radioactive element that's the Achilles heel of comic strip hero Superman.
Citigroup's economist Steven Wieting called the panel's impasse "another squandered opportunity" to bring clarity to the nation's fiscal outlook. Citigroup's investment strategist Tobias Levkovich dubbed it "Super Failure?" in a note to clients.
Reaction in financial markets to the latest round of political gamesmanship was similar to the market swoon back in August following the messy partisan bickering about the debt ceiling and the eventual downgrade of the nation's gold-plated triple-A credit rating. The timing of the supercommittee's impasse comes at a perilous time as the world grapples with a massive debt overhang.
Also on Monday, fears of financial contagion in Europe continued to swirl after ratings agency Moody's Investors Service said it may change its outlook on France's AAA rating from stable to negative in coming months, a news nugget that suggests Europe's debt crisis is worsening.
Investors are facing the new, uncomfortable reality that uncertainty over deficit and tax policy will now likely extend into the 2012 election season, a timetable shift that will put added pressure on the nation's nascent economic recovery, analysts say.
Wall Street fears that the inability of lawmakers to address the nation's growing deficit problem in a timely and politically orderly manner could prompt the leading credit rating agencies to further downgrade the nation's once-pristine credit rating. Back in August, Standard & Poor's downgraded the nation's credit to AA+, the first time in history the nation's credit received such a ding. The downgrade, coupled with the public spat between Democrats and Republicans over raising the debt ceiling, caused a massive investor shift away from risk that sent the Dow down more than 2,000 points in a two-week span ending in early August.
