Conventional wisdom said stocks would rally once Congress settled on an agreement to raise the debt ceiling and cut spending. Yet on the same day that President Obama signed the Budget Control Act of 2011 into law, the S&P 500 sold off more than 2.5%. The S&P is down almost 7% in the last seven trading days.
Of course, the selloff can't be blamed entirely on the events in Washington. Economic factors deserve some of the blame. For example, yesterday's ISM manufacturing index came in at just 50.9 for July, well below expectations and well below the 55.3 reading for June. Because the figure was greater than 50, it indicates expansion, yet the pace of growth in the manufacturing sector has markedly slowed. Tomorrow, ISM will release its services index, which has been weaker than the manufacturing index in recent months. Economists expect a reading of 53.7, but there is a good chance the index will fall below the critical 50 level.
Yet the bulk of the blame for the selloff must go to Congress and the president. Even those politicians who voted for the bill were anything but happy. There was no backslapping and President Obama chose not to host a signing ceremony. And as soon as he signed the bill in the privacy of his office, he talked about the need to increase taxes on the so-called rich. In his book that means people making as little as $200,000 per year. How they can be called millionaires and billionaires, I don't know. In any case, investors understood that today's bill was nothing but a temporary fix. They see nothing but more political dysfunction ahead. Investors came to one conclusion: Risk Off!