With the so called “Super committee” apparently failing to reach a consensus on the 10-year deficit-reduction plan, markets took a heavy battering and ended sharply lower on the opening day of the week. A political impasse had ultimately led to U.S.’s loss of ‘AAA’ credit rating in August this year. Investors are wary of another downgrade if Washington fails to meet its deadline for the $1.2 trillion deficit reduction plan.
The Dow Jones Industrial Average (:DJIA) plunged 248 points or 2.1% to end the day at 11,547.31. The Standard & Poor 500 (S&P 500) closed 1.9% lower at 1,192.98. The Nasdaq Composite Index declined by 1.9% to finish the day at 2,523.14. The fear-gauge CBOE Volatility Index (:VIX) went up modestly to trade at slightly lower than 33. On the New York Stock Exchange, NYSE Amex and Nasdaq, consolidated volumes were 7.78 billion shares, lower than the current daily average of 8 billion shares. Decliners completely outpaced the advancers on the NYSE, as for every six stocks that declined, only one stock managed to finish in the green.
None of the 30 Dow components managed to finish in the green. The declines were led by Boeing Co. (NYSE:BA), Bank of America Corporation (NYSE:BAC), Caterpillar Inc. (NYSE:CAT), Walt Disney Co. (NYSE:DIS), Hewlett-Packard Company (NYSE:HPQ), Intel Corporation (NASDAQ:INTC), Merck & Co. Inc. (NYSE:MRK) and United Technologies Corp. (NYSE:UTX) and they dropped 2.8%, 5.0%, 3.0%, 3.7%, 4.0%, 3.0%, 2.3% and 2.7%, respectively.
European concerns are looming large over the domestic markets and have been denting the markets on most occasions on a regular basis. Yesterday, the likely failure of the 12-member group of lawmakers or the “Super Committee” to reach an agreement on the plan of reducing the nation's deficit by $1.2 trillion over the next decade pushed the markets lower.
Now, that the November 23rd deadline is round the corner, a failure to close the deal on time, which is most likely, will cause sharp spending cuts from federally funded programs including Defense and Medicare. Following the failure of the lawmakers, it will be highly difficult for Congress to extend the payroll tax cut. But, investors fear that as a larger consequence this will result in another downgrade of the US’s credit rating. A credit rating downgrade in August, also caused by a political gridlock, had severely dented the financial markets. Thus, anything on that line might cripple the bourses once again. However, none of the rating agencies have had anything to say regarding the matter until now.
Last week saw the benchmarks post their worst weekly performance in almost two months and none of the positive economic reports could rescue the markets from the slump. It was the same story yesterday as a positive reading of the existing-home sales in October failed to lift sentiment. According to the National Association of Realtors (TSXV:NAR.V - News), total existing-home sales rose 1.4% in October to a seasonally adjusted annual rate of 4.97 million. This came in against the downwardly revised 4.90 million for the month of September. Lawrence Yun, NAR’s chief economist, stated: “Home sales have been stuck in a narrow range despite several improving factors that generally lead to higher home sales such as job creation, rising rents and high affordability conditions. Many people who are attempting to buy homes are thwarted in the process”.
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