Fear over debt fight taking hold with investors

[July 28, 2011]  WASHINGTON (AP) -- A fast-approaching deadline is bound to heighten anxiety. That's what happening on Wall Street as investors grow increasingly uneasy about the political stalemate over raising the nation's debt ceiling.

The Dow Jones industrial average has closed down for four sessions in a row. And the declines have been steeper each day, reaching almost 200 points Wednesday.

Lawmakers face an Aug. 2 deadline or risk triggering an unprecedented federal default and unpredictable fallout in the economy. As the contentious debate in Washington heated up, initially the stock market didn't show much reaction. But recent days have reflected signs of greater concern.

While no one was panicking, financial professionals who handle the investment accounts of everyday Americans -- college funds, retirement accounts and other nest-eggs -- said their customers were growing more worried by the day. One said he had not seen this level of anxiety since the 2008 financial crisis.

"We're getting a ton of calls," said Bob Glovsky, president of Mintz Levin Financial Advisors in Boston. "It's all `What happens if the U.S. defaults? What's going to happen to me?'"

Similarly, Glen Buco, a certified financial planner with West Financial Services in McLean, Va., said he started hearing from worried clients over the weekend, when talks in Washington failed to produce a compromise.

"The expectation was that there would be an agreement by this week. So now people are beginning to worry," Buco said. The calls are mostly coming from clients who are nearing or already retired and living off their portfolios.

But he said they are expressing more irritation at the political sparring and aren't yet panicking, but that may end soon.

Although Wednesday's decline of 198.75 points was not close to the stomach-churning days of the fall of 2008, when the Dow lurched lower and higher by 700 points some days, there were signs that fear on Wall Street was growing.

The concerns have spread overseas. Asian markets tumbled on Thursday, with Japan's bellwether index down about 1 percent, as the threat of a debt default by the world's largest economy rattled investors there.

"Right now the clouds are gathering," said Chris Long, a financial planner in Chicago.

Without a deal by Tuesday, the Obama administration has said the government will be unable to pay all its bills, and could miss checks to Social Security recipients, veterans and others who depend on public help. In addition, credit rating agencies could downgrade their assessment of the government's finances, further unnerving financial markets and perhaps causing interest rates to rise for everyone.

Already, some investors are taking precautions. Richard Shortt, 66, of Somerville, Mass., worries that a default, or even just a downgrade of U.S. debt, could cause bond and stock markets to tumble. Last week he sold about 10 percent of his stock holdings and put the proceeds into a money-market mutual fund.

"It might just be a short-term decline in the markets, but it could last a week or two while this gets resolved," said Shortt, a semi-retired small business consultant. "If we do get any sort of debt downgrade, even if we avoid a default, that will change the game a bit."

Financial advisers typically tell their clients not to tinker with their portfolios or try to play a short-term move in the market to their advantage. Of course, leaving investments alone could be a test of patience for the rest of this week.

On Friday afternoon, for example, it's plausible that Congress could reach a deal in mid-afternoon and send the Dow soaring 300 points in the final hour of trading. It's also plausible that there's still no deal and traders decide staying in the market over the weekend is too risky, and send the Dow plunging.

Investors who rode out the financial turbulence in 2008 without rejiggering their portfolios have made up most of their losses. The stock market has almost doubled since its post-meltdown low in March 2009. Many people who withdrew their money from the stock market during the worst haven't come close to breaking even.

The memory of the fall of 2008 remains vivid. The Dow plunged 778 points in a single day when Congress surprised investors by rejecting an early version of $700 billion legislation to bail out the nation's biggest banks.

"We've been through this, or something like it," said Leisa Aiken, a financial planner in Chicago. "I think what we went through in 2008 has toughened clients up a little. They realize that they will get through it if they don't give in to a knee-jerk reaction."

This time around, analysts say, the chances of similar turmoil are small but growing. Standard & Poor's, one of the rating services, has said that "the reverberations of the showdown may be deep and wide -- particularly if Washington does not come to a timely agreement on the debt ceiling."

Bond traders were still betting on a last-minute deal on the debt. The yield on the 10-year Treasury note, which should rise when investors believe there is a greater risk they won't get their money back, has stayed near 3 percent all month.

Even if Washington sails past the deadline without raising the debt limit, bond traders believe the Obama administration will keep up its interest payments and cut spending on everything else. The resulting shock to the economy and other financial markets would make Treasury bonds a safe place for investors to hide, which could result in lower yields.

One measure of investor concern, the Vix, or volatility index, shot up 14 percent on Wednesday. The tone of the market changed this week, as nervous investors began moving money out of stocks, said Howard Ward, a chief investment officer at asset manager GAMCO.

He said the stock market will likely become more volatile as the weekend nears, and while he said he was not repositioning his portfolio, he admitted: "Right now I'm pretty worried."

[Associated Press; By DAVE CARPENTER]

AP Business Writers Chip Cutter, Matthew Craft and David K. Randall in New York and AP Personal Finance Writer Mark Jewell in Boston contributed to this report.

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