By Peter Schroeder and Ian Swanson - 10/14/13 04:52 PM EDT
U.S. stock markets dropped sharply at the opening bell Monday but then rebounded a bit on news that congressional leaders would attend a White House meeting Monday afternoon.
Congress faces a Thursday deadline for raising the debt ceiling before the Treasury Department says it will not have the money to pay the nation's bills.
Wall Street watchers had been expecting a volatile Monday, with the possibility that the gains realized at the end of last week could be quickly given back.
“This feels a lot like Sunday night on Lehman weekend,” Westwood Capital managing partner Daniel Alpert said Sunday night, in a reference to the September 2008 collapse of the Wall Street giant that ushered in steep losses on Wall Street.
“Certainly, the market is likely to give back its end of week rally,” Alpert said.
“It’s kind of like ‘Groundhog Day,’ ” said Douglas Roberts of ChannelCapitalResearch.com. “There’s volatility until there’s some kind of resolution.”
There are signs the White House and Democrats see Wall Street as a helpful partner right now.
If stocks drop Monday and Tuesday, it would raise the pressure on Republicans already worried over polls showing they are getting the lion’s share of the blame for the government shutdown that is about to enter its third week.
Democratic leaders in the Senate over the weekend appeared to up their demands in the talks, even as they warned the stock market could plunge on Monday or Tuesday.
“This is playing with fire. We don’t know when the markets will react to this,” said Sen. Charles Schumer (D-N.Y.) Saturday. “I worry on Monday that, when the American markets open, maybe because of [a GOP block of a debt-limit increase], that they will start worrying and not only will the stock market go down, but interest rates go up and the value of U.S. Treasuries declines.”
The full market reaction might not be seen on Monday.
Stock markets are open Monday, but the bond markets remain closed until Tuesday due to the Columbus Day holiday.
The Dow Jones posed its second best day of the year Thursday on hopes for a deal between Speaker John Boehner (R-Ohio) and the White House.
A group of Republicans went to the White House Friday to discuss the offer. The two sides did not indicate their talks had failed until well after markets closed — a sign of the care Washington is beginning to take with the financial markets as the Thursday deadline gets closer.
Hopes for a deal now rest in the Senate, but there were few signs of movement Sunday, as Senate Majority Leader Harry Reid (D-Nev.) and Senate GOP Leader Mitch McConnell (Ky.) had but a short call.
Alpert sees a bad sell-off Monday, though he thinks it could be tempered by the soft opening.
“The only question will be whether it snowballs into a rout,” he said. “I don’t see that until Tuesday when we have some visibility on bonds, and folks see what ultimately comes out of D.C.
Tuesday will offer a better glimpse into investors’ thinking once the bond markets are open. The cost of borrowing for U.S. Treasury bonds could spike if financial institutions and other major investors begin to doubt Washington’s ability to stave off a default.
Axel Merk, the president and CIO of Merk Investments argued that the market reactions to the debt talks in Washington are overrated, and said watching for signals from the equity market about the prospects for a debt deal is a circus.
"It's a circus, except that the risk of failure, while low, would be catastrophic," Merk said.
Wall Street has issued regular warnings to Congress for weeks on the need to hike the nation’s $16.7 trillion debt limit.
At the same time, there’s been confidence a deal would be worked out, just as there was in 2011 and late last year, when the issue was the “fiscal cliff” of tax hikes about to set in.
“At this point, they think this will be resolved and this is all just one big game of chicken,” said Roberts.
The White House has sought to enlist the financial industry in its effort to convince House Republicans to back a clean hike to the debt ceiling.
But while the financial industry has strong ties to many GOP lawmakers, it has struggled to break through to those fighting against a debt-limit boost the hardest. Conservative Republicans who rode the Tea Party wave to power have few ties to deep-pocketed financial interests.
Before the strong close at the end of the week, the Dow had posted steady losses ever since Boehner agreed to push to defund the president’s healthcare law during the government funding fight.
Likewise, bond markets have begun to get a little antsy about the debt limit, driving up the costs of borrowing for the U.S. government as some investors begin to get wary of potential drama surrounding the normally rock-solid investment.
Some on Wall Street aren’t so sure they’ll have much of a say in the end game in Washington anyway.
Alpert, for example, said a big sell-off on Monday might not make that much of a difference.
“Is that enough to scare the crap out of everyone on the Hill and get them to do what they need to do fast?” he said.
And Roberts noted that stocks could always rise by the end of the day on Monday if rumors of a deal pop up.
“So much of this is based on rumors and perceptions,” he said.
—This story was posted at 6 a.m. and updated at 12:52 p.m.