Obama Downplays Wall St. Fall
Obama moved swiftly Monday to downplay ratings agency Standard & Poor’s downgrade of its U.S. credit outlook, calling the decision a political judgment that should not be taken too seriously. The timing of S&P’s announcement was unwelcome for the White House, coming just as Obama tried to regain the initiative on the deficit debate in Washington. The White House last week proposed reducing the deficit moderately over the next 12 years through a combination of tax increases, changes to Medicare, and cuts in military and other spending.
Wall Street fell more than 1 percent on as sovereign debt fears on both sides of the Atlantic and China’s monetary tightening hurt the outlook for global economic growth. Last week Obama laid out his plan to reduce the budget deficit by $4 trillion over 12 years, trying to give markets confidence that he was serious about tackling U.S. fiscal woes. S&P downgraded the outlook for the United States to negative, saying it believes there is a risk U.S. policymakers would not reach agreement on how to address the country’s long-term fiscal pressures by 2013.
House Republican leader Eric Cantor on Monday called the S&P downgrade “a wake-up call” against those seeking to “blindly increase” the U.S. debt limit. S&P questioned whether the White House and Republicans would be able to reach an agreement before the 2012 presidential elections on a plan to rein in deficits. This year’s shortfall is projected to be about $1.5 trillion, roughly 10% of the country’s gross domestic product. The U.S. debt now stands at $14.2 trillion and is expected to balloon in part because of rising costs for health care, retirement and other so-called entitlement programs, and the interest costs on existing debt. S&P said that even if a short-term deal is reached to contain deficits, any agreement could later be undone by politicians. Four stocks fell for every one that rose on both the New York Stock Exchange and the Nasdaq. In comparison, the reactions of the U.S. Treasury bond and dollar markets were more subdued. The CBOE Volatility Index (Chicago Options:^VIX – News) rose 10.7 percent after earlier climbing as much as 24.5 percent, its largest daily percentage jump since February 22.
The Dow Jones industrial average (DJI:^DJI – News) slid 140.24 points, or 1.14 percent, to 12,201.59. The Standard & Poor’s 500 Index (^SPX – News) declined 14.54 points, or 1.10 percent, to 1,305.14. The Nasdaq Composite Index (Nasdaq:^IXIC – News) dropped 29.27 points, or 1.06 percent, to 2,735.38.
The S&P 500 index fell below 1,300 for the first time since March 24, though it later rebounded above that level. Short-term support is seen near the 1,285 area.
Volume was low, with about 7.83 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year’s daily average of 8.47 billion.
As investors move to companies expected to outperform in uncertain economic times, the defensive S&P 500 sectors like utilities (^GSPU – News) and consumer staples (^GSPS – News) posted among the smallest losses in Monday’s slide.
Citigroup Inc (NYSE:C – News) was unchanged, closing at $4.42, after it reported a first-quarter profit that was slightly higher than expected, while Eli Lilly & Co (NYSE:LLY – News) fell 1.1 percent to $35.62 on concerns about looming generic drugs competition.
Caterpillar Inc (NYSE:CAT – News), hurt both by expectations of ballooning funding costs and China’s move to harness liquidity, slid 3.1 percent to $103.90.
China’s move and the downward revision of the U.S. credit outlook hurt basic materials and crude prices, sending the Reuters/Jefferies CRB index of commodities (^CRB – News) down 0.9 percent.
Dow component Exxon Mobil Corp (NYSE:XOM – News) dropped 1.4 percent to $83.10 while fellow blue-chip Alcoa Inc (NYSE:AA – News) fell 2.3 percent to $16.14.
But the U.S. government is likely to hit a $14.294 trillion debt ceiling no later than May 16, which means it would be much harder for the government to issue new debt unless Congress acts. If no action is taken, the government could default on its debt by July 8. Wall Street executives have called Capitol Hill with increasing frequency in recent weeks, urging them to raise the debt ceiling immediately. Some believe that bond yields could begin widening in June if no action is taken, pushing up interest rates, making it harder for companies to borrow and less likely to hire.
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