Stock Market Crushed As Fear Spikes

The U.S. stock market and its major indexes opened the week on a dour note as fear spiked over Friday’s sequestration deadline and doubts regarding the political future of Italy.

Major stock market indexes finished deeply in the red with the Dow Jones Industrial Average (DIA) dropping 216 points, (1.55%) the S&P 500 (SPY) falling 1.83%, the Nasdaq 100 (QQQ) tumbling 1.33% and the Russell 2000 (IWM) slipping 2.22%.

In other major markets, gold (GLD) gained 0.19% to close at $1579.60 and oil (NYSEARCA:USO) gained 0.3% to close at $93.27.

VIX, the CBOE S&P 500 Volatility Index, (VXX) also known as the “fear index,” spiked 34.02% as fear reentered U.S. financial markets.

The big worries center around this Friday’s sequestration deadline that, until today, has largely been a non-event. Investors apparently have been confident that yet another 11th hour solution would be reached by Congress and the White House, however, with just four days to go and both sides digging into their positions, the likelihood of the enforced cuts in government spending appears to be growing.

Today President Obama continued his informational blitz by calling on Republican Governors for cooperation and on Congress for compromise, while top Republican Congressmen John Boehner and Eric Cantor said that the President should work with Republicans. Despite these calls for working together, both sides remain far apart on the twin issues of increased taxes and government spending cuts in their respective prescriptions for avoiding the sequester.

With the clock ticking towards Friday, this high stakes game of chicken will likely continue rattling markets all week and even beyond should the cuts go into force.

In Italy, a widely watched election appears to have ended with potentially creating a split Parliament due to an unexpectedly strong showing by Silvio Berlusconi’s party in the Italian Senate races. The final result is yet unknown, but a hung government would be a first for the country and could serve to undermine the recent, publicly unpopular path of austerity that the country has undertaken.

Bottom line: The U.S. stock market has retreated from recent highs and now faces growing uncertainty as Friday’s sequestration deadline approaches. If Congress and the President can engineer another 11th hour save, as they have several times before, the stock market should return to calm and its previous upward trajectory. If the President and Congress fail to pull a rabbit out of their hats, volatility and downward momentum is the most probable outcome.

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