Wall Street: Keeping Calm in the Face of a Default?
The deadline is fast approaching for Congress to raise the debt ceiling. If they neglect to pass such a bill, the U.S. would default on its loans — a first — and a catastrophic financial crisis would likely ensue. That said, it’s understandable to crane our fiscal heads over to Wall Street and ask how the folks over there are handling the current situation. The answer — surprisingly — is that they are doing just fine, though how long that will last is up for debate.
The Dow Jones closing price fell a mere 0.4 percent from its close on Monday, according to USA Today, from $15,129 to $15,072 at its close on Friday. Beyond that, the Volatility Index, or VIX– a consistently used measure of stability and fear — actually decreased 5 percent from 17, and even at its peak, never broke 18.71.
Compare this to the first default scare back in 2011 when the VIX doubled in mere days, and Bank of America Chief Investment Strategist Michael Hartnett says “The VIX has barely risen.” Hartnett also points out that while investors pulled $60 billion out of the stock and bond mutual funds in August of 2011, only $1 billion has been removed at present.
The calm that has managed to persevere on Wall Street seems to stem from confidence that Congress won’t allow the U.S. to default on payments owed, losing international face in a major way. “I put zero chance on missed interest payments,” said David Bianco, the Chief U.S. Equity Strategist at Deutsche Bank AG.
However, not all are as confident of smooth sailing, according to Reuters. “With the government shutdown and all of the uncertainty around it, we’re pretty sure there will be additional negative impact on economic growth,” said Natalie Trunow — Chief Investment Officer of Equities at Calvert Investment — emphasizing concern over consumer spending. Trunow adds that because the market is in such good position with year-to-date returns it is “easy for investors to take some profits off the table and step back and watch this unfold.”