Debt Limit Deal a Cold Comfort to Investors

The compromise debt-reduction legislation passed by Congress and signed into law Tuesday by President Obama was forged through months of rancorous debate marked by childish tantrums, angry finger pointing and endless passing of blame.

And for what? If anything, the deal has raised more doubt than it settled, leaving frustrated Americans wondering whether all the fuss was worth it.

One need look no further than the U.S. stock markets to determine that what passed for a resolution of the so-called debt crisis in Washington, D.C., did little to resolve the fear and uncertainty permeating the economic landscape.

Stocks narrowly avoided a ninth straight losing session on Wednesday, with the Dow Jones Industrial Average down more than 100 points at one point before pulling into positive territory late in the day. On Tuesday, the day the Senate approved a deficit reduction deal that also raised the U.S. debt limit by $2.4 trillion, the Dow plunged 266 points and the S&P 500 fell into negative territory for the year.

Stocks havent skidded so badly since October 2008, during the darkest days of the recent financial crisis.

Meanwhile, its looking increasingly likely that the U.S. could be headed back into recession. The labor market is stagnant and economic growth virtually non-existent. Its hard to escape the conclusion that as these problems were getting worse, congressional leaders and the Obama administration squabbled over pet ideologies.

Hardline Republicans, for instance, fought for a constitutional amendment that would require a balanced budget. A nice idea perhaps but one that was never going to pass in Congress. And liberal Democrats sought to balance the budget of the backs of the wealthiest Americans. Also a non-starter.

So, granted, the debt limit deal prevented an embarrassing default by the U.S. government and a potentially devastating ripple effect. But at what cost? The U.S. appeared rudderless and its leaders ineffective. Congress and President Obama took a beating during the long and bruising negotiations. Polls show the public is disgusted with just about everyone involved.

The presidents job approval rating is at an all-time low of 40%, down from 50% in early June. The precipitous decline is due almost solely to fallout from the extended debt negotiations and the perception that Obama was following rather than leading.

Republican House Speaker John Boehner and Democratic Senate Majority Leader Harry Reid are faring even worse than Obama in the polls. A CNN poll put Congress overall approval rating at 14%, the lowest ever.

A different poll conducted by the Washington Post and the Pew Research Center revealed that the most commonly used descriptions used by Americans for the debt negotiations included ridiculous, pathetic, and childish and outrageous.

While the extended political posturing clearly struck most Americans as unseemly and unnecessary, investment professionals, most of whom expected a last minute agreement, came away with different concerns.

I dont think it was a timing thing. People generally expect it to be ugly and polarized in Washington, said Nick Kalivas, vice president of financial research at Chicago-based futures broker MF Global Holdings.

The outcome was on the disappointing side. The so-called spending cuts arent enough to be game changing, and all they did was kick the tough decisions off to a commission, Kalivas explained.

Kalivas was hardly alone in casting a skeptical eye toward the provision in the debt reduction law that calls for $2.1 trillion in spending cuts over the next decade with more than $1 trillion of those cuts to be determined at a later date and pinpointed by a bi-partisan congressional committee.

After the messy and prolonged process that concluded yesterday, why would anyone believe that an as-yet selected congressional committee will be able to peacefully and efficiently cut billions of dollars from emotionally symbolic and extremely popular entitlement programs such as Medicare and Medicaid?

Heading into the deficit cutting negotiations months ago everyone agreed that, as millions of baby boomers reach retirement age, health care entitlement programs need to be reformed if the U.S. is truly serious about getting its fiscal house in order.

But the deal signed yesterday barely addresses that issue.

The uncertainty doesnt go away, said Kalivas. We have no idea what the outcome is going to be.

On the one hand, there is a sliver of optimism to be gleaned from the notion that Washington is finally being forced to take a hard look at its addiction to spending. But little can be taken away from the actions of the past few months that would offer hope for either a common sense approach or courageous leadership on the part of our elected officials.

Months of bickering and dithering occurred, all as an Aug. 2 default deadline hovered with truly global and potentially devastating ramifications. The inability to address the issue in a timely and effective manner still threatens the U.S.s coveted AAA credit rating.

And in the end the compromise did little more than push the tough decisions off to some future point. Presumably after all the main players are safely re-elected.