November 21, 2011
As the realization sets in that the Super Committee has been a super failure, businesses and investors are once again facing heightened political and budgetary uncertainty – and on Wall Street, uncertainty is a four-letter word.
Goldman Sachs on Friday warned that failure by Congress’ Joint Select Committee on Deficit Reduction could see the Standard & Poor's 500-stock index fall to 1,100, or some 10 percent, but other investors, most of whom didn’t have high hopes for the Super Committee, predicted that the long-term market reaction would be muted. Wall Street on Monday nevertheless showed its displeasure with the congressional gridlock. Stocks tumbled from the opening bell, with the Dow Jones industrial average sinking more than 340 points – nearly 3 percent –before climbing off its lows to finish the day down 248.85 points, or 2.1 percent. All 30 blue-chip stocks posted losses, and the index itself is now back in the red for the year. The S&P 500 and the Nasdaq composite each also fell by nearly 2 percent.
The grim outlook for the Super Committee wasn’t the only factor weighing on stocks, though, as Europe continues to inject plenty of uncertainty into the global economic picture. The hot potato of debt-crisis concerns once again landed on France, as credit-rating agency Moody’s warned that rising spreads between French and German interest rates, combined with slowing growth and broader euro zone concerns, could “amplify the fiscal challenges the French government faces” and put pressure on the country’s Aaa borrowing status. “The domestic and external economic growth outlook presents significant downside risks,” Moody’s analyst Alexander Kockerbeck wrote.
Moody’s had warned in mid-October that it could cut its outlook on France’s rating from stable to negative in three months, underscoring the dangers the debt crisis poses to the eurozone’s second largest economy and, ultimately, to the entire euro experiment. Credit Suisse warned Monday that markets may well have “entered the last days of the euro as we currently know it.”
With Europe’s crisis continuing to unfold in slow motion, the announcement that the Super Committee failed to agree on $1.2 trillion in deficit-reduction measures for the next decade will only raise more doubts about the strength and viability of the U.S. economic recovery going into 2012.
The Super Committee’s impasse could have pronounced effects on sectors such as defense and health care. The failure would trigger automatic cuts of $600 billion in defense and another $600 billion in discretionary domestic spending, though some in Congress are already taking aim at undoing those automatic cuts. The domestic cuts include a 2 percent reduction in Medicare reimbursements to hospitals and healthcare providers. Corporate leaders in those areas have already been using the “U” word. “As we plan for 2012, the defense market is shrouded by the uncertainty of the continuing resolution and the activities of the congressional Super Committee,” Jay Johnson, CEO of defense contractor General Dynamics, said in an October 26 conference call with analysts. “It is clear that defense spending will be part of addressing our nation's economic problems. However, the manner and degree to which cuts are made will dictate how they impact our industry.”
Beyond the impact on specific sectors, though, the Super Committee failure could also have a broader effect. “Job-creating American businesses of all sizes anxiously await the signs of certainty and resolve that a bipartisan agreement on deficit reduction would send,” Boeing CEO Jim McNerney wrote in a letter to the Super Committee last Monday. “In contrast, failure to strike a deal that at least meets the minimum target will further erode the confidence of American businesses and key global stakeholders in the ability of our political system to deliver good governance when confronted with profound economic challenges.”
Some on Wall Street have already warned that Congress’ inability to come together on a plan could result in a second credit-rating downgrade for the U.S., but if another cut comes, it won’t be immediate. Any cost-cutting agreed to by the Super Committee wouldn’t have kicked in until 2013, and ratings agencies will wait to see if the automatic cuts ultimately go into effect or if Congress can come up with some other deficit-reduction plans. Standard & Poor’s said late Monday that its ratings and outlook are not affected, but noted that the committee’s inability to agree on a deal “is consistent” with the rating agency’s August decision to downgrade the U.S., largely because of the federal government’s political dysfunction.
A more pressing concern, many on Wall Street have said, is that several stimulative tax breaks and benefit programs, including the payroll tax cut and expanded unemployment insurance, are set to expire at the end of the year, and the Super Committee’s failure leaves the extension of those programs in doubt. “The major near-term uncertainty on the fiscal policy front involves the payroll tax cut, investment tax incentives, and unemployment benefit provisions that are scheduled to expire at the end of 2011,” Morgan Stanley economist David Greenlaw wrote in a note to clients late last month. Those programs together are worth $175 billion, or a little more than 1 percent of GDP, Greenlaw estimated. Others on Wall Street have suggested that the economic effect could be even greater, potentially making the difference between modest growth and weak growth, or weak growth and recession.