Eighteen months after the last round of U.S. debt-ceiling talks pushed stocks lower, the impending confrontation between congressional Republicans and the White House over federal borrowing is returning to haunt markets.
As the CHART OF THE DAY shows, the number of news stories including the phrase “debt ceiling” has surged since Congress passed a deal to avoid more than $600 billion of tax increases and spending reductions on Jan. 1. The last time there was such attention on the term, in mid-2011, the Standard & Poor’s 500 Index plunged 16 percent.
“The more the politicians will be seen fighting, the more volatile the stock market will get,” said Alessandro Fezzi, senior market analyst at LGT Bank Schweiz AG in Zurich. The debt ceiling is “seen as one of the biggest risks to the world economy. I think it’s a good reminder of the fundamental problems we still face. That doesn’t mean politicians won’t find a compromise in the last minute, as they so often do.”
Lawmakers may need to approve an increase in the $16.4 trillion debt ceiling as early as mid-February, with Republicans planning use the vote to force President Barack Obama to accept cuts in entitlement programs such as Medicare. While Congress has raised or revised the limit 79 times since 1960, negotiations over the threshold in 2011 led S&P to strip the U.S. of its top AAA credit rating and pushed the nation’s stocks within 1 percentage point of a bear market.