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By Karl Henkel
Local experts say fears of a national default led to the Dow Jones Industrial Average’s worst week of 2011.
But they say there’s still time to prevent significant economic damage — like a double-dip recession — but time is running out.
After a 180-point dip from the end of trading Tuesday through closing on Wednesday, the Dow dropped 140 points at Friday’s opening. It recovered and posted a 97-point loss by closing, but still tumbled 538 points since last Friday.
Cleveland-based economist George Zeller told The Vindicator that Friday’s Dow dip was two-pronged: One, because of the debt crisis and two, because of a weak second-quarter Gross Domestic Product report.
The government report released Friday showed a growth of 1.3 percent from April through June; the report also revised downward its growth estimate from the first quarter, from 1.9 percent to 0.4.
The two factors contributed to the largest Dow drop so far this year.
Richard Horvath, vice president of American Financial Services in Boardman, said this week’s stock market sellers were fear-stricken individuals and said those holding onto investments shouldn’t panic — yet.
“Most trading we’re seeing right now is individuals [who] have fear,” he said. “But institutional money managers haven’t been moving money much at all.
“They move the markets.”
Horvath said another drop could come Monday, if there is no weekend resolution to the debt ceiling debate. He said AFS would reevaluate the landscape on Monday before recommending if customers, who have called en masse with questions concerning their investments, should sell or hold steady.
If the House and Senate don’t come to an agreement by Tuesday morning, about a half-day before the United States would default on it’s $14.3 trillion debt, Tarick Bernat, president of AFS, said markets could slide even further.
“I can’t say for sure, but if they [institutional money managers] are going to make a move, it’s going to be Tuesday morning,” he said.
A market dive could be the first of many economic dominoes to fall if America defaults.
The nation’s most pressing issue is ensuring its AAA credit rating stays intact. In the case of default, it’s a certainty the U.S. will suffer a downgrade.
The slightest of downgrades — to AA — would deepen America’s deficit hole. It would cost an additional $100 billion annually in interest payments, something Sen. Sherrod Brown, a Democrat from Avon, on Wednesday likened to a “permanent tax hike on all Americans.”
Standard & Poor’s and Moody’s are two financial services groups that have been rumored to downgrade America’s credit ratings, though S&P was the same company that gave AAA credit ratings to risky loans before the market crash and eventual recession.
Zeller said a default and downgrade could signal the beginning of another recession, but stopped short of making that prediction.
“It certainly makes it more likely,” he said.
Robert Gardner, CPA and financial adviser with Stifel, Nicolaus & Co. Inc., Butler Wick Division in Canfield, said he believes the government will avoid default, but a debt-ceiling only deal without budget reform, something U.S. Rep. Tim Ryan, a Democrat from Niles, told The Vindicator was unlikely to occur, wouldn’t necessarily deter a credit rating downgrade.
“I think any decision on the U.S. credit rating would come after that deal is reached and the details of the agreement will be known,” Gardner said. “A downgrade, or possibly no change, would depend on whether the agencies feel the U.S. has seriously addressed its budget and spending issues.”
Couple that with slow economic recovery figures during the second quarter and it makes for even more unstable financial markets moving forward.
Gardner said if the nation reaches Aug. 2 and no debt-ceiling deal is imminent, it could be painful for the markets.
“We all remember when the [Troubled Asset Relief Program] vote was initially voted down in the fall of 2008 and the Dow fell nearly 800 points,” he said.
“No one wants to relive that. One positive through all this is that corporate earnings have largely been positive and many corporate balance sheets are strong, holding significant amounts of cash, and that may be providing some support as we work through this.”