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CNN
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The market is preparing for a perfect storm of bad news. Latest concern? The looming debt ceiling drama in Washington.
The United States hit its borrowing limit on Thursday, forcing the Treasury Department to take “extraordinary measures” to keep the government open.
If no deal is reached, markets could collapse (like they did last time in 2011) and the US credit rating could be downgraded again.
“From both an economic and financial perspective, not raising the debt ceiling would be an absolute disaster,” said David Kelly, chief global strategist at JPMorgan Funds, in a report earlier this week.
Kelly added that “a failure to raise the debt ceiling represents the most immediate fiscal threat to the economy and markets in 2023” and that an agreement is needed sooner rather than later to calm markets.
“The financial chaos would probably eventually lead to a compromise in Washington. However, this may not happen soon enough to prevent a recession and could leave some lasting scars, including a permanent increase in the cost of financing the US government debt,” Kelly said.
That would be catastrophic news for the economy. And investors no longer shrug off the negative headlines.
There is a saying on Wall Street that bad news for the economy is actually good news for the stock market and vice versa. That’s because investors often bet that bleak headlines will eventually prompt the Federal Reserve and other central banks to cut interest rates and provide other stimulus that can help boost corporate earnings… and stock prices.
But Wednesday’s big market sell-off and Thursday’s continued slide may mark a turning point for market sentiment. The Dow fell about 250 points, or 0.7%, in late morning trading and has now reversed its year-to-date gains. The S&P 500 fell 0.9% while the Nasdaq fell more than 1%.
After a promising start to the year, stocks appear to have taken a turn for the worse. Bad news can actually be bad news.
“We’ve nested in anticipation of a soft landing for the US economy,” said Kit Juckes, chief global FX strategist at Societe Generale, in a report Thursday. “Take the covers off and it feels cool.”
Yes, the Fed is now likely to hike rates “only” a quarter of a point when its two-day meeting ends on Feb. 1 as inflationary pressures ease.
Still, the promise of smaller rate hikes and the possibility of a Fed pause later this year are no longer enough to counter growing evidence that the US economy may be in for a rough patch.
Retail sales fell more than expected in December. Industrial production also fell unexpectedly last month, a sign of weakness in manufacturing.
“A string of economic data releases…suggest that the economy is finally slowing across the board and that the all-important consumer is becoming increasingly cautious about spending,” said Quincy Krosby, LPL Financial’s chief global strategist, in a report.
“What markets saw cheering weaker data just a few weeks ago…is now being judged more harshly as bad news is no longer warmly welcomed,” she added.
Big bank returns were mixed. Rising mortgage rates have already dampened demand for housing. And several bank CEOs have warned that a recession could be looming.
Market strategists at Evercore ISI said in a report on Wednesday that “the market’s New Year’s rally is complete” and that the latest data reinforces the base case of a recession beginning in the second half of this year.
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