US markets in modest decline as threat of debt default sends stocks wavering

A trader looks up at a screen on the floor of the New York Stock Exchange at the market open in New York. Photograph: Carlo Allegri/Reuters

Stocks opened modestly on Monday as Wall Street traders continued to respond with patience to the threat of a US default and continued to expect a last-minute deal to allow the Treasury to pay its bills. 

The Dow Jones Industrial Average, which tracks 30 of the most influential companies in the US, the S&P 500 Index and the Nasdaq were all down only half a percent in morning trading.

That was a modest dip considering that stock futures were down sharply on Sunday night, hinting at a darker opening session than the one that resulted. Futures are often a good indicator of market reaction the next day, and are used by policymakers and investors during weekend negotiations as a way to predict how stocks will react to crises. Still, there are fewer people who buy and sell futures compared to stocks – particularly on weekend nights – so they can be misleading. Monday is also the Columbus Day bank holiday in the US, which means less trading activity. 

Since the US government shut down in early October, stock markets have remained stable amid legislative chaos in at the Capitol. 

"The political scene is a whipsaw of news flows and surprises. As a money manager, we know that this is a dangerous way to make investment decisions," said David Kotok, of Cumberland Advisors in a note to investors. 

Last week, stocks rose sharply, up 2%, after Washington appeared on the brink of compromise, with holdout House Republicans proposing a short-term extension to the debt ceiling. 

"Just because politicians are talking with each other, for two days stock markets have again exploded. I guess the market is celebrating its relief that politicians are talking at each other rather than past each other," Kotok wrote. 

TIAA-Cref, an influential pension fund, said in its weekly markets update that "despite Washington gridlock, we remain optimistic on the US economy and equity markets".

"We are encouraged by the fact that equity markets, while volatile, have not been subject to panic selling in the face of the recent uncertainty," said head of equity investments William Riegel and head of global public fixed-income markets Lisa Black in a note on Monday. "If we do see a sharp market drop, we believe it will be a buying opportunity."

While leaders on Wall Street and the corporate world have consistently said that default would be "utterly catastrophic" in the words of Deusche Bank chief Anshu Jain, few believe that Congress will allow the US to skip out on its scheduled payments. The Treasury has to pay $32bn in interest payments on government bonds as well as social security payments for the remainder of October. The big payment comes on 1 November, when the Treasury has to pay $67bn in benefits to social security recipients as well as payroll for the military. 

Money managers have been patient, if cautious. "We never thought the odds of default were very high, but the intensity of the rhetoric was sufficient to raise them above zero," Kotok said. 

Others were even more sanguine. "In my opinion, we will not default," JP Morgan Chase chief executive Jamie Dimon said last week at a panel at the Institute of International Finance. 

Dimon also said that JP Morgan would continue to process $6bn to $8bn of government benefits, like social security, even in the event of a default. That would allow benefits recipients to continue to draw money from their bank accounts even if the government hasn't technically paid them. 

In two previous iterations of the debt-ceiling debate in 2011 and 2012, stocks reacted sharply to Washington negotiations, only to stabilize once a deal was struck at the last minute. That has created the expectation among investors that last-minute deals are the congressional custom when it comes to the debt ceiling