US stocks had their worst week of the year amid fears the debt-ceiling impasse in Washington would provoke a ruinous default or a downgrade of the US’ credit rating.
The Dow Jones Industrial Average tumbled 4.2 percent for the week to close at 12,143.24 on Friday, having fallen for six consecutive trading days.
The broader S&P 500 dropped 3.9 percent for the week to 1,292.28, while the tech-heavy NASDAQ Composite fell 3.6 percent to close at 2,756.38.
“The probability of a debt downgrade increased quite a bit this week,” said Owen Fitzpatrick, head of US equities at Deutsche Bank Private Wealth Management. “It’s really just the uncertainty. Different types of events have happened in history and we know to some extent how markets react to those events, but here we never had a credit downgrade. It’s uncharted territory.”
The US Department of the Treasury says if the government’s US$14.29 trillion debt ceiling is not raised by Tuesday, it could be forced to default on its obligations, which would have disastrous effects on financial markets.
Even if the US Congress raises the debt limit in time, ratings agencies may still decide to downgrade the US’ triple-A credit rating, a move that would have unpredictable consequences.
Democrats and Republicans remain deadlocked amid bitter disputes over taxes and spending even as the deadline has drawn perilously close.
“This weekend is going to be very telling, if they can come to some sort of agreement over the weekend and offer some stability to the markets,” said Marc Pado, chief US market strategist for Cantor Fitzgerald.
Adding to the grim mood on Wall Street, the government said on Friday that the US economy grew at only a 1.3 percent pace in the second quarter, much worse than the 1.7 percent estimated by economists.
Even companies that reported strong second-quarter results were bruised by the sell-off. Shares of Boeing, which raised its earnings forecast for this year after its profits soared 20 percent, fell 3 percent for the week.
Many investors dumped stocks altogether and fled to safe havens like gold.
Oddly, they also snapped up US Treasury bonds, despite growing doubts about the creditworthiness of the government.
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