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Market Preview: Still Scant Signs of Progress in D.C.

NEW YORK ( TheStreet) -- The House of Representatives is eventually going to vote on the debt plan being pushed by the Republican leadership and it may even pass but it's hard to see this as real progress as the Senate is waiting in the wings to shoot the bill down.

There are rumblings that some sort of compromise is slowing bubbling up behind the scenes but time may have grown too short. The wheels of democracy grind slowly and nothing in how this saga has played out indicates both sides will suddenly come to their senses and not make a battle out of every detail.

Ian Shepherdson, chief U.S. economist at High Frequency Economic, calls the current situation "a recipe for stalemate" and sees the risk of the government missing the Aug. 2 deadline to raise the debt ceiling as "very high" with the possibility of an embarrassing shutdown also in play.

"[W]e certainly cannot rule out the idea that compromise will prove impossible, in which case the government would have to begin to shut down before a new deal could be reached," he writes.

If a deal does get done in time, Shepherdson expects the resolution to come closer to the plan being pushed by Senate Majority Leader Harry Reid, which he estimates would lead to a reduction in spending plans of $70 billion, relative to prior expectations, or 1/2% of gross domestic product, a level that he feels is palatable.

"That 's not much, and as a $50B cut has been in our base case forecast for next year for some time, it does not require us to make any meaningful adjustment to our projections," he says. "Our core view remains that growth will surprise to the upside next year, provided a debt deal is done, primarily because better credit conditions for small businesses will facilitate a huge rebound in activity in the sector, which accounts for half of GDP and generated two thirds of the new net jobs in the last cycle."

Stocks have now fallen five sessions in a row so the drama in Washington, D.C. is taking a toll. The latest American Association of Individual Investors sentiment survey showed the bull camp thinned out a bit in the past week, falling 2 percentage points to 37.8%, below the long-term average of 39%. Those identifying themselves as bearish about stocks for the next six months swelled to 31.4% of respondents, up 0.8 of a percentage point.

At the same time, the so-called smart money has grown more excited about stocks in July, according to TrimTabs monthly poll of hedge fund managers.

"Bullish sentiment on the S&P 500 soared to 43%, the largest share since December 2010, from 27% in June," the firm said. "Bearish sentiment sank to 27%, the smallest share since January 2011, from 38%. Note that hedge fund managers were markedly bullish in only one month in H1 2011."

Even if the debt-ceiling situation is magically solved overnight, Friday will have plenty of data for investors to ponder.

The main attraction will be gross domestic product for the second quarter at 8:30 a.m. ET. The consensus is for growth of 1.6%, but is much more optimistic at 2.1%.

There's a healthy range of estimates out there from Macroeconomic Advisors at 1.3% to High Frequency Economics up at 2.5% and S&P Economics at 2.4%. First-quarter GDP grew 1.9%, so it'd be nice to see growth eclipse that pace but given the mixed signals from the economic data the past few weeks, a surprise could be in the offing.
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