Richard Drew / AP
Trader Frank O'Connell works on the floor of the New York Stock Exchange on Wednesday.
The stock market is getting a little bumpy as the government shutdown wears on, but if Congress pushes a deadline on the federal debt limit in two weeks, you can buckle up for something much scarier — maybe even a replay of the 2008 financial crisis.
The difference: The shutdown, a dispute over the federal budget and the new health care law, will probably take a small bite out of economic growth. Messing with the debt limit would alarm investors around the world who lend the United States trillions of dollars.
Dan Greenhaus, chief global strategist for the brokerage BTIG, told his clients in a note Wednesday morning that it appears increasingly likely that the fight over the shutdown will spill into a battle over the debt limit.
“We had said we were starting to get nervous,” he said. “If this continues, nervousness will have to give way to fright.”
You don’t have to look far into the past to remember what fright looks like: During the crisis of 2008, the Dow Jones industrial average lurched up and down by hundreds of points in minutes. It lost almost 5,000 points from the collapse of Lehman Brothers to the market bottom six months later.
Nothing remotely that bad so far, but investors are feeling edgy.
On Wednesday, the Dow sank 58 points. It was down as much as 146 points earlier in the day. A report on job growth in the private sector came in lower than expected, which suggests that the economic recovery is weaker than market analysts believed.
The shutdown has left an estimated 800,000 federal employees home without pay, money they would otherwise be pouring back into the economy. And it has made other Americans, even those whose jobs are unaffected, worried about the economy.
President Barack Obama told CNBC on Wednesday that he is “exasperated” by the shutdown and warned Wall Street that the country is “in trouble.”
It was just two weeks ago, on Sept. 18, that the Dow set an all-time closing high of 15,676. As worries about the shutdown and corporate profits have grown, the Dow has slid to 15,133. That’s about 3.5 percent, less than what happened when the federal government shut down for a total of four weeks in 1995 and 1996.
The real concern comes later this month, when the government exhausts its authority to borrow money — which it does by selling U.S. Treasury bonds and bills to investors around the world.
To keep borrowing and paying the bills, Congress must raise the federal debt limit, which is $16.7 trillion. Already, the Treasury Department has started tinkering with some of its financial tools to buy a little time. But Treasury Secretary Jack Lew has warned that the government will out be of options on Oct. 17.
This may sound familiar. Republicans in Congress faced off with the White House in the summer of 2011 over the debt limit. The credit rating agency Standard & Poor’s downgraded its rating of U.S. government bonds for the first time in history.
That sent the stock market into its worst convulsions since 2008, including a drop of 635 points in the Dow on the first day of trading after the S&P downgrade.
S&P has already warned this week that political brinksmanship is exactly the reason that the United States has never recovered the top-of-the-line AAA credit rating it lost two years ago. If the Oct. 17 deadline passes without a deal on the debt limit, S&P warned that it could classify the United States as being in “sovereign default.”
Hugh Johnson, the chief investment officer and chief economist at Hugh Johnson Advisors, a financial management company in Albany, N.Y., warned that such a downgrade could send the stock market into hysterics.
And if a downgrade forces investors around the world to dump their U.S. bonds, interest rates could spike.
In the 2011 crisis, the reverse happened: Interest rates fell because investors determined that there was still no safer place in the world to put their money than U.S. bonds. Johnson said he thinks such a silver lining is unlikely this time.
Erskine Bowles, who served as White House chief of staff under President Clinton, told CNBC on Wednesday that hitting the debt ceiling would be “really bad” — rattling faith in the dollar as the world’s reserve currency.
“The shutdown is bad. It’s painful. It does hurt some people. It costs the taxpayers some real money,” he said. “But it’s not catastrophic. We hit this debt ceiling, that’s catastrophic.”
So where does that leave everyday investors — the tens of millions of Americans whose retirement savings are tied up in stocks through 401(k) accounts? Johnson told NBC News that he’s telling customers to do their best to ignore the antics in Washington.
Try to relax, he said, because the odds are that all of this will be resolved. Don’t try to buy and sell the daily swings in the market — that’s never a good long-term strategy. Keep your eyes on the overall health of the economy.
“Try to be calm and try to be rational,” he said, “when those in Washington are not.”
This story was originally published on Wed Oct 2, 2013 12:53 PM EDT