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June 10, 2011, 12:01 a.m. EDT
By Howard Gold
NEW YORK (MarketWatch) "” Stocks had a rough month in May and have continued to struggle in June. The Standard & Poor's 500 index closed lower for five consecutive weeks through last Friday.
The pundits blame it on the imminent end of the Federal Reserve's quantitative easing (QE2) program, and renewed worries over the weak links in the Euro zone "” Portugal, Ireland, and most of all Greece.
Read Howard Gold's April warning about problems ahead for stocks on MoneyShow.com.
QE2 is being phased out just as the economy weakens again but investors have anticipated the program's end for weeks. And European countries are preparing a new fix for Greece's debt problems.
Federal Reserve Bank of Philadelphia President Charles Plosser discusses the outlook for growth in the U.S., inflationary pressures and the U.S.'s long-term fiscal challenges.
The U.S. is another story, and that's where the next big hurdle for this market may come.
As QE2 ends, the debate over an increase in the debt ceiling will move to center stage. Dire warnings and brinksmanship from both parties will fill the headlines, airways and blogosphere this summer, showing Washington at its worst.
Investors, already worried about the struggling economy, will be biting their fingernails as they wait to see whether the U.S. government will default on some of its obligations.
That ugly process is likely to be bad for stocks in what's already the seasonally worst period of the year. But a timely agreement between Democrats and Republicans "” which seems remote now "” could spur a rebound. The failure to strike a deal could have the opposite effect, of course.
"The rhetoric will get more confusing over the next few weeks, and markets hate uncertainty," said Greg Valliere, chief political strategist of Potomac Research Group. He thinks a deal ultimately will get done.
The stakes are high. The debt ceiling is an agreed-upon cap on the amount the U.S. Treasury can borrow. Congress has raised the debt limit 74 times since 1962 so the federal government can meet its obligations.
Usually it's just a rubber-stamp exercise. But this time a Republican-controlled House of Representatives, which swept into power on the back of the Tea Party movement, is preparing to take a stand against too much federal spending and picked the debt ceiling as the battleground.
Valliere called the 87 freshman Tea Party House Republicans "unlike any group I've ever seen in my career. These people don't give a damn about being re-elected. They feel they are on a mission from God to cut spending," he told me.
The debt ceiling sits at $14.3 trillion, which the U.S. already exceeded in May. Secretary of the Treasury Timothy Geithner has said the country will begin to default on its obligations if the ceiling isn't raised by Aug. 2, setting the stage for the battle ahead.
"If Congress failed to increase the debt limit, a broad range of government payments would have to be stopped, limited or delayed, including military salaries and retirement benefits, Social Security and Medicare payments, interest on the debt, unemployment benefits and tax refunds," Geithner warned in an April 4 letter to congressional leaders.
"Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover. For these reasons, default by the United States is unthinkable."
"President Obama to nominate Martin Gruenberg to succeed Sheila Bair as head of FDIC http://on.mktw.net/mF1kZl" 6:56 p.m. EDT, June 10, 2011 from MarketWatch
"CafePress Inc., an online service for customizing clothing and accessories, filed papers today for an IPO http://bit.ly/iT05j6" 5:24 p.m. EDT, June 10, 2011 from MarketWatch
"Groupon should postpone its IPO, here is why http://bit.ly/iCfqvj" 4:16 p.m. EDT, June 10, 2011 from MarketWatch
"One in six Americans will get sick this year from the food they eat http://bit.ly/lrwL5u" 3:58 p.m. EDT, June 10, 2011 from MarketWatch
"If you have $2.3 million you can have lunch with Warren Buffett http://bit.ly/mwJCeK" 3:39 p.m. EDT, June 10, 2011 from MarketWatch
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