Another Week of Uncertainty Ahead of Wall Street

Another week of uncertainty lies ahead for Wall Street as no agreement is in sight between Republicans and Democrats in Washington regarding the budget, and the deadline for Congress to raise the debt ceiling approaches, or the U.S. will be unable to meet its financial obligations.

The Dow Jones index fell 1.2 percent last week, to 15,072 points, while the S&P 500 index decreased by 0.1 percent, to 1,690 points. Conversely, the Nasdaq index strengthened by 0.7 percent, to 3,807 points.

The decline in the Dow Jones and S&P 500 indices is a result of unsuccessful negotiations in Congress regarding the budget for the fiscal year that began on October 1, which led to the suspension of many government services last Tuesday, while about one million employees were placed on unpaid leave.

The stalemate in Congress raises concerns that Republicans and Democrats will not reach an agreement on a much more critical issue – raising the debt ceiling from the current $16.7 trillion.

If an agreement is not reached by October 17, the U.S. government will be unable to meet all its financial obligations, which could severely shake the financial markets.

– This is unlikely, but the risk exists. If it happens, the consequences would be significant as the market has not accounted for such an event. It would not only affect the domestic market but globally as well – says Quincy Krosby, an analyst at Prudential Financial.

The level of investor concern is evidenced by the sharp rise in the VIX ‘fear index’ of the Chicago Board Options Exchange. This index has jumped more than 25 percent in the last two weeks, to 16.7 points, indicating that investors are increasingly hedging their portfolios against a potential further decline in stock prices.

Investors are also worried that the suspension of government services will slow the growth of the U.S. economy. The longer it lasts, the greater the damage to the economy.

– As the shutdown continues and the environment is filled with uncertainty, we are quite certain that it will negatively impact the economy, especially consumption – says Natalie Trunow, a director at Calvert Investment Management.

To make matters worse, due to the shutdown, authorities have not released macroeconomic reports for a week. Therefore, investors are left to make decisions without key data that could guide them.

However, this week they may receive guidance from corporate earnings results, as the season for third-quarter financial report releases begins.

Due to the weak growth of the U.S. economy and not-so-great business conditions worldwide, analysts have lowered their estimates in recent weeks.

In the latest Reuters survey, it is estimated that earnings for 500 companies whose stocks are included in the S&P index will be 4.5 percent higher in the third quarter compared to the same period last year.