Stocks move higher, but investors remain cautious

By Ken Sweet, Associated Press

Friday, Oct. 4, 2013 | 12:29 p.m.

NEW YORK — Stocks moved higher on Wall Street on Friday, but investors remained focused on Washington, where a partial government shutdown and a fast approaching deadline on the nation's borrowing limit have weighed on markets all week.

The stock market rose for just the third time in 12 days. The Dow Jones industrial average was up 71 points, or 0.5 percent, at 15,067 as of 2:15 p.m. Eastern. The Standard & Poor's 500 index was up 11 points, or 0.7 percent, at 1,690 and the Nasdaq composite index was up 33 points, or 0.9 percent, at 3,807.

Despite Friday's gains, the trend for the last three weeks in the stock market has been lower. The Dow is down nearly 4 percent since hitting an all-time high on Sept. 18.

Congress appeared no closer to ending the shutdown or meeting an Oct. 17 deadline to allow the government to increase its borrowing limit so it can continue to pay its bills on time. On Friday, Republicans in the House of Representatives said they would pass more small spending bills that fund parts of the government, such as Head Start, but that tactic has found little traction with the Democrats in the Senate.

"The intransigence on both sides has created a very difficult situation," said Stephen Auth, chief investment officer of equities at Federated Investors.

While remote, the possibility of the U.S. failing to pay its bills or creditors is frightening.

"Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse," the Treasury Department said in a report Thursday.

Investors went through a similar case of political brinkmanship in August 2011, which ultimately led to Standard & Poor's downgrading the United States' credit rating. The S&P 500 fell roughly 12 percent in the weeks that followed.

Because of that precedent, the political noise out of Washington has come to dominate nearly all conversations on Wall Street.

Under normal circumstances, traders would have the government's monthly jobs report to parse through on the first Friday of the month. But the shutdown has forced the Labor Department to postpone the release of September's data for at least the foreseeable future.

And few traders are talking about third quarter corporate earnings reports either, which start next week.

"The market is going to remain completely occupied by Washington until this is resolved," said Bob Doll, chief equity strategist and portfolio manager at Nuveen Asset Management, which oversees $126 billion.

Despite these concerns, both Doll and Auth said they believe the possibility that the U.S. government would willingly default on its debt is remote. House Speaker John Boehner reemphasized on Friday that he would not let the U.S. government default.

"It's hard to really say how this is going to end, but I think it's unthinkable that it will end with a default of the U.S. government," Auth said.

However, parts of the bond market are starting to show stress as the Oct. 17 debt ceiling deadline nears. Yields for the one-month T-bill that mature around the time the U.S. government is expected to hit its borrowing limit have risen to their highest level in a year. The yield on one-month T-bill was 0.13 percent, up sharply from 0.01 percent five days ago.

Bond market observers said that fund managers for money market funds, who primarily invest in these types of securities, have been selling short-term Treasuries. Fund managers don't want to be stuck holding U.S. government debt maturing around the time the federal government hits its borrowing limit.

Average investors have also been moving out of riskier assets as well. Roughly $300 million was pulled from stock mutual funds last week, according to fund tracking firm Lipper. It was the first time this year that mutual funds saw net outflows, Lipper said. Exchange-traded funds also saw investors head toward the exits, with $2.8 billion leaving ETFs last week.

"We have seen a pull out of (stocks) and investors moving to cash," said Kristina Hooper, head of U.S. investment strategies at Allianz Global Investors. "We're very focused on being there, holding our client's hand and helping them think about the long-term so they're not getting rattled by what is short-term event."