James Dennin, Kapitall: Last time Congress battled over national debt, the S&P fell almost 17% the next day. Which stocks are prepared in case history repeats?
All eyes are on Washington this week, as concerns of another war have subsided and the markets have turned their attention to the budget battle in Congress. House Republicans have been very clear that they
intend to use the upcoming debt ceiling
to create leverage in their fight to prevent the implimentation of the Affordable Care Act, among other things.
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The US Treasury could run out of money to fund its operations
as soon as October 1
. While a government shutdown would be destructive, most analysts are saying that refusing to heighten the debt ceiling would have profound economic implications itself.
The last time Congress failed to raise the debt ceiling in a timely manner, America's credit was downgraded and the S&P 500
slipped almost 17% in a single day
. While stock markets have improved considerably since 2011 – the best annual gain in four years - many are worried that a debt ceiling debate could
jeopardize the fragile recovery
. Besides, the downgrade in US credit has already resulted in billions in new borrowing costs. If a similar situation were to play out, it could get considerably more expensive for American firms to borrow money.
Uncertainty over Congress is likely why Chairman Bernanke and the Federal Reserve have
even further into the fall than previously expected. This will help keep borrowing costs down, although American markets will not, as they did in 2011, benefit from extra liquidity resulting from a European debt crisis.
While the S&P 500 is likely to take a hit in the coming weeks, it may also recover quickly. Republicans, adamant as they may be about stopping Obamacare, do not want to see borrowing costs skyrocket and equities plummet any more than Democrats do.