What shutdown? Wall Street shows no fear

3:32 PM, Oct 6, 2013   |    comments
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NEW YORK - Where's the fear? The U.S. is running low on cash. The government still hasn't fixed the problem. Yet Wall Street is taking things in stride.

Back in the summer of 2011, the last time Washington lawmakers were in a fiscal fist-fight and talk of a first-ever U.S. default dominated the airwaves, Wall Street was mighty scared. How scared? A widely followed stock market "fear gauge," known as the VIX, doubled in a matter of days in early August.

On Aug. 1, 2011, the day Congress voted at the last minute to raise the nation's borrowing limit, or debt ceiling, the fear gauge reading was a tad below 24, already 50% higher than it was a month earlier. But a week later on Aug. 8, the first trading day after the nation's gold-plated triple-A credit rating was downgraded, the VIX skyrocketed to 48. In short, Wall Street registered a double dose of fear.

In contrast, in the current budget impasse, or Day Four of the government shutdown, fear is conspicuously absent from the Wall Street scene, despite dire warnings from the U.S. Treasury on Thursday that a U.S. debt default would lead to a financial crisis on par, if not worse, than the 2008 financial crisis.

In fact, on Friday, the VIX actually declined 5% to around 17, just a tad above the 16.60 closing reading on Sept. 30, the day before the government shutdown began. Even at its peak on Day Three of the shutdown Thursday, the fear gauge only popped as high as 18.71.

The lack of fear is showing up in the performance of the major stock indexes. The Dow Jones industrial average has fallen just 0.4% in the four-day shutdown. And the benchmark Standard & Poor's 500-stock index is actually up 0.5% in that period.

"This time around, the VIX has barely risen," says Bank of America Merrill Lynch chief investment strategist Michael Hartnett. In another sign that fear and panic are virtually non-existent, Hartnett notes that the crisis back in August 2011 spooked investors so much that they yanked $60 billion out of stock and bond mutual funds. In the current budget impasse, barely $1 billion has flowed out of these investments.

The lack of fear is due largely to the fact that virtually nobody on Wall Street thinks Congress is crazy enough to let the nation default on its obligations. Even missing a single interest payment to government bond holders is viewed as having a zero probability of occurring.

Such a default would be an unprecedented event that would cause massive disruptions and negative ramifications to financial markets and the credibility and standing of the U.S.

"I put zero chance on missed interest payments," says David Bianco, chief U.S. equity strategist at Deutsche Bank.

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