Stock Markets Surge Higher on Possible Debt Ceiling Hike


Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stock markets around the world today are up as House Speaker John Boehner suggested a debt ceiling hike that would be enough to pay the government's bills for six weeks, which is enough time to negotiate an agreement and avoid a debt ceiling disaster. As of 1:15 p.m. EDT the S&P 500 was up 27 points to 1,682, while the Dow Jones Industrial Average was up 227 points to 15,030.

After a meeting with the Republican leadership earlier today, Boehner told reporters that Republicans will offer a plan to President Obama that would raise the debt ceiling for six weeks. Boehner did not offer any plan for ending the government shutdown, saying, "That's a conversation we're going to have with the president today." The House Republican leadership is set to meet with Obama this afternoon. Obama has said he wants any extension to include the reopening of the government.

Stocks are reacting as if it's a done deal and are being led higher by financials, which would be the worst affected by a government default. Leading the S&P 500 today is JPMorgan Chase , up 2.5%, followed by Citigroup and Bank of America both up more than 2%.

Economists estimate that for every week the government is closed, GDP growth will be lowered by 0.1 to 0.15 percentage points. The effects of the shutdown can already be seen in today's unemployment claims report:





New unemployment claims

Sept. 28 to Oct. 5



Unemployment claims jumped by 66,000 to a six-month high, and the less volatile four-week moving average jumped 20,000 to 325,000.

US Initial Claims for Unemployment Insurance Chart
US Initial Claims for Unemployment Insurance Chart

US Initial Claims for Unemployment Insurance data by YCharts.

Furloughed federal employees were not eligible to claim unemployment last week, but depending on the state they reside in, many will be able to claim unemployment benefits this week. The jump in unemployment claims is the result of companies laying off employees because of the shutdown, including Dow component United Technologies. Unemployment claims will likely continue to spike next week as furloughed government employees become eligible.

We are less than two weeks into the shutdown; if it lasted another six weeks, we'd be looking at a total hit to GDP growth of somewhere between 0.8 and 1.2 percentage points. That's a deep blow, considering GDP growth was 2.5% in the second quarter, but it's nowhere near so bad as what would happen if Congress allowed the country to actually default on its obligations.

If Obama does accept the offer, hopefully Congress uses the opportunity to come to some agreement and doesn't just keep kicking the can down the road every six weeks.

What can you do?
In both the public and private sectors, governance functions best when stakeholders educate themselves, take an active interest in what's going on, and hold their representatives accountable.

You can educate yourself by reading The Motley Fool's new free report, "Everything You Need to Know About the National Debt," which provides step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!

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Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. He owns shares of Bank of America. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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