Posted by: Schuyler R. Thorpe | August 13, 2011

Stocks Fall 207 Points AS US Edges Closer To Debt Default

Stocks fall as lawmakers remain at odds over debt

NEW YORK (AP) — Stocks plunged Wednesday as the United States edged closer to an unprecedented default on its debt. The Dow Jones industrial average was headed for its worst weekly decline in nearly a year.

The Dow fell 207 points, or 1.7 percent, to 12,292 in afternoon trading, its biggest one-day drop since early June.

The S&P 500 fell 25 points, or 1.9 percent, to 1,307. The Nasdaq composite index fell 71 points, or 2.5 percent, to 2,769.

Stocks traded lower all day. The declines worsened in the afternoon after the Federal Reserve released a survey showing that the economy deteriorated in much of the country this summer. The economy slowed in seven of the Fed’s 12 regions because of weak home sales and a slowdown in manufacturing.

The declines in small-company stocks were even worse than those of large companies like the 30 industrial giants that make up the Dow average. The Russell 2000 index, which tracks smaller U.S. companies, fell 2.8 percent.

Because they are more vulnerable to economic downturns, the stocks of small companies tend to fall more than the rest of the market when the economy slows down or the stock market turns volatile. With the deadline for a debt deal less than a week away, the stocks that investors consider to be the riskiest are falling the most.

Stocks have been falling broadly since last Friday as an Aug. 2 deadline for raising the U.S. borrowing limit approaches. With no sign of a compromise between Republicans and Democrats in Washington, investors are becoming more fearful that the U.S.’s triple-A credit rating could be lowered or that the country might default on its debt.

Either event would raise interest rates across the board and slow down the already weak U.S. economy.

House Speaker John Boehner had planned to hold a vote on his debt-limit plan Wednesday. That was postponed after conservative lawmakers balked at the proposal and congressional budget officials said it would have cut spending less than advertised. The White House had also threatened to veto Boehner’s plan.

“As hours pass and the uncertainty builds, I think the market is starting to price in the potential that we might not have a solution by Aug. 2,” said Channing Smith, managing director of Capital Advisors Inc. “Confidence in our political system is beginning to fade.”

The Dow is down 2.7 percent this week. It is headed for its biggest weekly decline since early August 2010. The S&P 500 is also down 2.9 percent, and the Russell 2000 is down 4.7 percent.

Some analysts fear that if the debt issue is not resolved stocks could fall as much as they did in 2008, when the House of Representatives voted down a bill to create the Troubled Asset Relief Program on Sept. 29. On that day, the Dow plunged about 778 points. Four days later, Congress passed the TARP bill and President George W. Bush quickly signed it into law. The Dow then jumped as much as 946 points in a week.

Most investors still expect some kind of resolution in the coming days. But the uncertainty over possible changes to tax rates or government spending has made investors uneasy, said Todd Salamone, senior vice president of research at Schaeffer’s Investment Research. “Investors just want a lot of clarity,” he said.

A decline in orders for manufactured goods also pushed stocks lower. The government said orders for durable goods fell 2.1 percent in June because of a drop in demand for commercial aircraft, automobiles and heavy machinery. Manufacturing has been disrupted this year by parts shortages from Japan and higher energy prices.

Earnings results were mixed. Amazon.com Inc. rose 5.7 percent after the online retailer reported that its earnings and revenue were far higher than analysts were expecting.

Dunkin’ Brands Group Inc. shot up 39 percent on the company’s first day on the Nasdaq. The parent of Dunkin’ Donuts and the Baskin-Robbins ice cream chain went public to help pay down its debt.

Juniper Networks Inc. plunged 20 percent, the most of any company in the S&P 500, after the computer networking equipment maker issued an earnings forecast that was lower than many analysts expected. Computer networking equipment companies, including Cisco Systems Inc., have struggled this year because many Internet providers spent heavily on their products in 2010. As a result, they don’t need as much new equipment now. Cisco fell 3 percent, while equipment maker JDS Uniphase Corp. fell 6.3 percent.

Delta Air Lines Inc. fell 5 percent. The airline’s earnings were lower than analysts had anticipated because of higher jet fuel expenses and costs related to voluntary buyouts for 2,000 workers.

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