Economic Woes Override Debt Drama for Investors

Growing concern about the economy is overriding any relief investors may be feeling now that Washington appears to have a debt deal that will avert a default by the federal government.

The House on Monday evening passed a bill that would raise the U.S. debt limit by at least $2.1 trillion and cut spending by a similar amount over the next decade. The agreement was reached Sunday night by congressional leaders and President Barack Obama. The Senate is expected to approve it on Tuesday, and it will go to Obama, who has indicated he will sign it.

U.S. investors, however, had a tepid reaction to the deal Monday, and that continued after the House approved it following the close of trading on Wall Street. The reason: The accord does little to address underlying worries about the economy, analysts and investors say.

Standard and Poor's 500 futures index, a barometer of upcoming trading on the broader U.S. stock market, was down a little less than 2 points late Monday after the vote in the House. And Japan's Nikkei 225 stock average, which had risen 1.3 percent Monday, opened 1.3 percent lower Tuesday.

The mild sell-off in Asia reflected Wall Street's pessimism Monday after a disappointing report on U.S. manufacturing. The Dow Jones industrial average finished down 10.75 points, its seventh consecutive decline. The Dow began the day up more than 140 points before falling by as many as 145.

The potential for an upswing in the U.S. market on Tuesday could be muted because of the widespread expectation that the House would pass the deal and that the Senate will follow.

"The passage has been priced into the market," said John Osbon, who manages about $40 million at Boston-based Osbon Capital Management.

Other economic news could have a greater market impact in the near term than the debt deal. The number that investors care most about this week is likely to be the jobs report that will be released on Friday.

"The jobs report is an instant indicator — it's like taking someone's temperature and finding out if they have a fever or are freezing to death," Osbon said. "The cuts in the agreement on the other hand are going to take place over 10 years."

Market-watchers were surprised by the report on manufacturing by the Institute of Supply Management. The index fell to 50.9 in July from 55.3 in June. It was the lowest in two years and came in the wake of a government report last Friday that showed the economy was growing at its slowest pace since the recession ended in June 2009.

"This was a shock to the market," said Phil Orlando, chief strategist at Federated Investors. "It clearly offset the emotional strength that we saw in the open from this tentative budget compromise."

Reflecting the concerns, bond yields fell to their lowest level of the year Monday as investors moved into safer assets. The yield on the 10-year Treasury note fell to 2.75 percent from 2.80 percent late Friday.

New skepticism also surfaced about the full impact of the budget-cutting. There's no guarantee that all of the spending cuts called for in the accord will take place because they must be agreed to by a joint committee of Congress by the end of November and then approved by both houses.

"We're not out of the woods yet," said Michael Sheldon, chief market strategist for RDM Financial Group in Westport, Conn. "We're really in uncharted territory here."

Still, he and others said the House vote was a step in the right direction.

"It's another avenue of relief for investors," said Russell Price, senior economist for financial planning firm Ameriprise Financial Inc. in Minneapolis, after the House vote. "Certainly anxiety has been growing by the day, and people will be glad to have this behind them."

But at least half of the recent 4.3 percent sell-off in the S&P 500 is related to slow economic growth. Those issues, he said, haven't gone away.

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