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A stalemate in Washington over lifting the debt ceiling, combined with gloomy economic data, sent the blue chips tumbling more than 4% for the week.
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The Dow Jones Industrial Average slipped 69.9 points, or 0.79%, to 12,143, the S&P 500 fell 8.4 points, or 0.65%, to 1,292 and Nasdaq Composite dipped 9.9 points, or 0.36%, to 2,756. The FOX 50 dropped 7.7 points to 918.
The markets fared better for the month than on the week: the Dow and S&P 500 both lost 2.2%, while the Nasdaq inched lower by 0.6%.
The House of Representatives is expected to vote on the debt bill proposed by Republican Speaker John Boehner, which will raise the debt ceiling in two moves, on Friday night after the vote was postponed late Thursday.
The new plan includes a trigger that would require a balanced budget amendment to be passed the second time the debt ceiling is raised, a move that would be highly unpopular among many Democrats. Indeed, Harry Reid, the Senate Democratic Leader, has repeatedly said the bill will fail in the Senate, and the Obama Administration has threatened to veto a similar plan.
A failure to raise the debt limit by the Aug. 2 deadline may force the U.S. to miss benefits payments for million of Americans, fail to pay certain government contractors and potentially default on its debt. Ratings companies have also warned that a downgrade of America's coveted 'AAA' credit rating will come if lawmakers fail to craft a credible plan to reduce the deficit. As the negotiations tick on it is becoming less and less likely that a major deal will be crafted, analysts have said, meaning a downgrade may be more likely.
While it is impossible to say exactly what the effects of a downgrade, or worse, default, would be, many economists predict it will have a negative affect on the economy.
There is not "any historical episode [that is] a close parallel to current US circumstances," analysts at Goldman Sachs wrote in a research note to clients, adding "uncertainty about market effects is high."
An initial reading on U.S. gross domestic product showed the economy expanded at an annualized pace of 1.3% in the second quarter, worse than the 1.8% economists expected. Additionally, first-quarter GDP was revised significantly lower to 0.4% from the previous estimate of 1.9%. Indeed, the pace of the economic recovery has been quite slow by historic standards.
"The current recovery is, nominally speaking, the worst of any recovery since the early 1920s," wrote Daniel Greenhaus, chief global strategist at BTIG, in a research note. "That is truly both a historic and awful accomplishment and yet it underscores the size and scope of the issues facing the United States."
Reuters/University of Michigan's final revision of July consumer sentiment fell to 63.7 from a preliminary reading of 63.8 coming in just shy of economists' forecasts of 64. Consumer sentiment directly affects several sectors, particularly retailers like Best Buy (NYSE:BBY).
A report from the Institute for Supply Management on manufacturing activity in the mid-west came in below expectations as well. The index fell to 58.8 from 61.1 the prior month, falling short of expectations of a reading of 60.
In corporate news, Merck (NYSE:MRK) and Chevron (NYSE:CVX) are the last of six Dow components to report second-quarter earnings this week.
Merck revealed profits excluding one-time items of 95 cents a share on revenue of $12.2 billion. The pharmaceutical giant's bottom-line matched estimates, while sales beat calls of $11.8 billion.
Chevron earned $3.85 a share, well better than the $3.56 analysts estimated. The second-largset U.S. oil company's revenue grew to $67 billion, missing estimates of $71.6 billion.
Energy markets were in the red.
Light,sweet crude fell $1.74, or 1.8%, to $95.70 a barrel. Wholesale RBOB gasoline slipped by less than a penny to $3.11 a gallon.
Prices at the pump were stable overnight. A gallon of regular costs $3.71 on average nationwide, up from $3.54 last month, and well higher than the $2.74 drivers paid last year.
Amid the volatility, traders once again flocked to gold, which has continually hit record highs. The precious metal gained $15.00, or 0.93%, to $1,631 a troy ounce. Silver climbed 31 cents, or 0.78%, to $40.11 a troy ounce.
In currencies, the euro gained 0.32% against the U.S. dollar, while the greenback fell 0.41% against a basket of world currencies.
Yahoo (NASDAQ:YHOO) reached an agreement with Alibaba Group and Softbank over Alibaba's Alipay e-payment unit.
Vodafone (NASDAQ:VOD) plans on paying out the $3.2 billion dividend it is expected to get from Verizon Wireless to shareholders, sending shares soaring.
Amgen (NASDAQ:AMGN) posted adjusted second-quarter profits of 1.37 a share, zipping past estimates of $1.28.
UBS (NYSE:UBS) tapped Bank of America's (NYSE:BAC) Mike Stewart to be its co-head of global equities.
The English FTSE 100 fell 0.99% to 5,815, the French CAC 40 dipped 1.1% to 3,673 and the German DAX dipped 0.44% to 7,159.
In Asia, the Japanese Nikkei 225 slipped 0.69% to 9,833 and the Chinese Hang Seng fell 0.58% to 22,440.