Media Stocks, Broader Markets Dip On Debt Ceiling Jitters, And It Could Get Worse

UPDATED with Wed. market activity: U.S. stocks continue to lose ground Wednesday on fears of a debt-ceiling impasse that could lead the nation into recession. At midday, the Dow was down about 250 points.

On Tuesday, it closed down 230 points, reversing earlier gains. Other indexes fell as well, with the S&P 500 dipping by 1.12%, the Nasdaq by 1.26% and the Russell 2000 by 0.43%.

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President Joe Biden and House Speaker Kevin McCarthy met late Monday afternoon and called their talk constructive but there was still no sign of a deal to allow the U.S. to continue borrowing to fund its broad range of financial obligations. Republicans continue to ask for wide spending cuts and some other measures for their support in raising the debt ceiling. McCarthy reportedly left a Tuesday meeting telling Republicans the two sides are nowhere near a deal.

It’s getting close to a so-called X-Date – or the moment when absent that raise the U.S. government will no longer be able to pay bills of any kind, including interest on government bonds, salaries for federal employees, contractors, payments to agencies and programs including Social Security and Medicare, and to the military. The U.S. hasn’t defaulted on its debt in this way before, so it would be uncharted territory. Treasury Secretary Janet Yellen says that with no agreement the X-Date could fall as early as June 1.

Recession fears prompted by high interest rates and inflation have been weighing on media stocks already, especially those most dependent on advertising. The shares followed the broader markets lower today with Warner Bros. Discovery falling nearly 4%. Disney, Netflix and Comcast were down around 2%.

The U.S. last came close to defaulting on its debt in August of 2011 under President Obama with similar brinksmanship by Republicans in Congress. A deal then was reached about 72 hours from a deadline and after ratings agency S&P downgraded the U.S. credit rating for the first time in the country’s history. The S&P 500 lost nearly 20% in the weeks of partisan fighting before and after the deal as the effects lingered.

Economists today don’t think the current risk is fully built into stocks yet — that is, Wall Street can’t quite believe politicians would be that reckless — meaning there’s still significant downside potential.

Moody’s Analytics recently estimated that just one week of breach would erase 1.5 million jobs. That number could rise to 7.8 million if the default lasted longer, into the summer, with surging unemployment and a stock market plunge wiping out ten trillion dollars in household wealth.

“While policy makers have thus far, in the long history of our Nation, avoided inflicting such damage on the American and even global economies, virtually every analysis we have seen finds that default leads to deep, immediate recessionary conditions,” says the White House website looking at potential impacts. “Economists may not agree on much, but when it comes to the magnitude of risks invoked by closely approaching or breaching the debt ceiling, we share this deeply troubling consensus.”

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