U.S. stocks managed to weather a crisis of confidence in regional banks, but if history is any guide, the market could be poised for some serious losses if the battle over the raising the federal debt ceiling drags on.
If the market’s reaction to the debt-ceiling fight in Congress mirrors its behavior in 2011, when Republicans brought the U.S. to the brink of default before striking a deal to raise the borrowing limit in exchange for restrictions on deficit spending, then the S&P 500 index could wind up roughly 20 percentage points lower, as Jeffrey Hirsch, editor of the stock traders’ almanac, pointed out in a series of tweets.
“Markets topped out on the last trading day of April 2011 and entered a mini-bear phase with S&P down 19.4% on a closing basis before bottoming on October 3,” he said. Historically, U.S. stocks tend to rise during the year before an election year, but “uncertainty and headwinds can take a bite out of usual pre-election year gains,” he added.
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