The market is bracing for a perfect storm of bad news. The latest worry? The impending\u00a0debt ceiling\u00a0drama in Washington.
\nThe United States hit\u00a0its borrowing cap\u00a0on Thursday, forcing the Treasury Department to start taking \u201cextraordinary measures\u201d to keep the government open.
\nIf an agreement isn\u2019t reached,\u00a0markets could plunge\u00a0(like they did the last time this happened in 2011) and the United States risks having its\u00a0credit rating downgraded\u00a0again.
\n\u201cFrom both an economic and a financial perspective, a failure to raise the debt ceiling would be an unmitigated disaster,\u201d said David Kelly, chief global strategist with JPMorgan Funds, in a report earlier this week.
\nKelly added that \u201ca failure to increase the debt ceiling is the most immediate fiscal threat to the economy and markets in 2023\u201d and that a deal is needed sooner rather than later in order to reassure the markets.
\n\u201cFinancial chaos would, presumably, eventually lead to some compromise in Washington. However, this might not occur soon enough to prevent a recession and could leave some lasting scars, including a permanent increase in the cost of funding U.S. federal debt,\u201d Kelly said.
\nSome on Wall Street are hoping that the worst case scenario can be avoided, though.
\nMoody\u2019s Investors Service said in a report Thursday it expects Congress will ultimately reach an agreement on a new debt limit before Treasury exhausts those \u201cextraordinary measures.\u201d However, negotiations on Capitol Hill could be lengthy and contribute to market volatility.
\n\u201cGiven an extremely fractious political environment, we anticipate an agreement will likely only be reached very late or in an incremental fashion, potentially contributing to flare-ups in financial market volatility,\u201d Moody\u2019s analysts said.
\nThey added that \u201ca debt limit impasse will likely be resolved before a missed interest payment occurs because of public, political and financial market pressures on Congress reflecting concerns about the potentially severe consequences that a missed payment could have on financial markets and the economy.\u201d
\nA default would be catastrophic news for the economy. And even though that still seems unlikely, investors are no longer shrugging off debt ceiling worries and other negative headlines.
\nThere\u2019s a saying on Wall Street that\u00a0bad news\u00a0for the economy is actually\u00a0good news\u00a0for the stock market and vice versa. That\u2019s because investors often bet that dismal headlines will eventually prompt the Federal Reserve and other central banks to cut interest rates and provide more stimulus that can help boost corporate profits\u2026and stock prices.
\nBut\u00a0Wednesday\u2019s big market sell-off\u00a0and the continued slide Thursday might represent a turning point for market sentiment. The\u00a0Dow\u00a0ended the day down more than 250 points, or 0.8%, and is now flat for the year. The\u00a0S&P 500\u00a0also fell 0.8% while the\u00a0Nasdaq\u00a0slid by 1%. Stocks finished slightly off their lows from earlier in the day, though.
\nStill, after a promising start to the year, stocks have seemingly taken a turn for the worse. Bad news actually might be bad news.
\n\u201cWe\u2019ve been snuggled up in expectations of a soft landing for the US economy,\u201d said Kit Juckes, chief global foreign exchange strategist at Societe Generale, in a report Thursday. \u201cTake away the blanket and it feels chilly.\u201d
\nYes, the Fed is now likely to raise rates by \u201conly\u201d a quarter of a percentage point when its two-day meeting wraps up on February 1 as\u00a0inflation pressures abate.
\nStill, the promise of smaller rate hikes and the possibility of a Fed pause later this year is no longer enough to counteract the growing evidence that the US economy may be in for a rough patch.
\nWeaker economic numbers spooking Wall Street
\nRetail sales fell\u00a0more than expected in December. Industrial production unexpectedly slid last month too, a sign of weakness in the manufacturing sector.
\n\u201cA clutch of economic data releases\u2026indicate that the economy is finally slowing more broadly, and that the all-important consumer is becoming increasingly careful about spending,\u201d said Quincy Krosby, chief global strategist for LPL Financial, in a report.
\n\u201cWhat just some weeks ago would have seen markets cheering the weaker data\u2026is now being judged more harshly with bad news no longer enjoying a warm welcome,\u201d she added.
\nEarnings from big banks\u00a0have been mixed.\u00a0Surging mortgage rates\u00a0have already dented demand for housing. And several bank CEOs have warned that\u00a0a recession may lie ahead.
\nMarket strategists at Evercore ISI declared in a report Wednesday that \u201cthe market\u2019s New Year rally has concluded,\u201d and that recent data reinforces a base case of a recession beginning in the second half of this year.<\/p>\n