Markets Plunge after Obama Speech
NEW YORK CITY & SANTA FE, NM (By Josh Boak, Politico) September 10, 2011 — Deep skepticism about Congress passing President Barack Obama’s $447 billion jobs package and fears Greece could slip into default sparked a severe stock market selloff on Friday.
The Dow Jones Industrial Average closed down 304 points, or 2.69 percent, a reminder of how dangerously fragile the situation is despite government initiatives worldwide to stabilize the economy and fuel growth. “There is only so much we can withstand before we move into a recession,” said Mesirow Financial chief economist Diane Swonk.
Europe had primarily caused the downturn, Swonk said, although political gridlock and reports of a possible terror attack on the 10th anniversary of Sept. 11 on Sunday also weighed heavily on traders Friday. German officials said Chancellor Angela Merkel’s government is putting together a strategy for supporting banks in the event Greece defaults, according to Bloomberg News.
A default could ignite a further selloff that would bite into the revenues and profits of American companies with European operations, a shock that could possibly pull the stalled U.S. economy into a full-blown recession.
Tangent Capital’s James Rickards said Wall Street has already priced Washington dysfunction into the market. Still, traders found little reason for optimism in the president’s address to Congress Thursday night. With Republicans controlling the House of Representatives, the jobs package — which may be the last chance at a fiscal stimulus for next year — will undoubtedly struggle to survive the legislative process intact.
“Why is this plan unlikely to pass?” wrote Bank of America Merrill Lynch economists Neil Dutta, Michael Hanson, Ethan Harris. “Primarily because the broad contours of the plan are similar to the 2009 stimulus plan, with more than half of the stimulus coming from spending increases. That plan passed in the context of a deep recession and with a Democratic majority in both houses of Congress — no House Republicans voted for the plan.”
The jobs package is roughly half the size of the 2009 stimulus. Analysts estimate the Obama plan, if fully enacted, could increase GDP next year by as much as 2 percent, with its combination of reduced payroll taxes, extended unemployment benefits, aid for state and local governments, and a steep ramp up in construction spending.
Obama said in his address to Congress his plan is paid for, but he didn’t detail the specific ways he intends to meet the cost. Those specifics will come in the weeks ahead, according to the White House. Despite the plan’s possible economic benefits, the charged political climate has turned against the prospect of additional short-term deficit spending to pay for the jobs package. UBS analyst Drew Matus noted the public is wary of piling on any debt, citing a recent poll by NBC and The Wall Street Journal. “The president’s plan faces a key challenge from the public’s continued concern over the budget deficit,” he said. “As of the end of August, 56 percent of Americans want the president and Congress to focus on the deficit while only 38 percent want them to focus on boosting the economy.”
House Majority Leader Eric Cantor (R-Va.) has said he is open to passing some elements of the plan piecemeal. Besides the ideological objections of GOP lawmakers, the legislative agenda this fall will be dominated by 2012 budget negotiations and a super committee responsible for cutting the debt by more than $1.2 trillion over the next decade.
Traders will likely pay close attention to the Sept. 15 jobs speech by House Speaker John Boehner (R-Ohio) at the Ronald Reagan Building in Washington, which could indicate where the GOP and White House can find common ground.