Stocks jump on talk in Washington of debt-ceiling deal

(MoneyWatch) Stocks soared Wednesday after congressional leaders in Washington took steps to avoid a potentially devastating U.S. debt default.

In what is the second-biggest gain of the year for equities, the Dow Jones industrial average shot up 323 points, or 2.2 percent, to end the day at 15,126. The Standard & Poor's 500 also rose 2.2 percent, while the Nasdaq composite index added 83 points.

Yields on short-term Treasury notes also fell in another sign that fear of a default is receding. Interest rates on one-month Treasury bills had surged in recent days as investors sold the debt out of concerns that the government might miss bond payments.

"It's a hope rally," said Mark Luschini, chief investment strategist with broker-dealer Janney Montgomery Scott, noting that investors are pinning their hopes on a deal in Washington to raise the nation's borrowing limit. "The rally is part of a recovery of what was lost in the market over the last week and a half to two weeks leading up to the shutdown and post-shutdown."

House lawmakers were scheduled to meet with President Barack Obama at 4:30 p.m. ET. Earlier in the day, White House spokesman Jay Carney suggested that Mr. Obama is open to a short-term hike in the debt ceiling, while noting that he prefers a longer-term measure.

Investors were buoyed after House Republicans proposed raising the debt limit for six weeks. That would head off an Oct. 17 deadline for Congress to increase the government's borrowing authority. U.S. Treasury officials have said that failing to raise the ceiling puts the government in danger of defaulting on its debt. Treasury chief Jacob Lew reiterated that warning on Thursday, saying that a Republican proposal to prioritize government payments risked causing "irrevocable damage" to the economy.

Economists, business leaders and other financial experts concur with that assessment, saying that a debt default threatened to throw the U.S. back into recession and slow global economic growth.

Yet while a short-term increase in the debt ceiling buys time, it only postpones finding a more comprehensive solution, some observers said. "Kicking the can down the road doesn't solve anything," said Lance Roberts, chief strategist at investment management firm STA Wealth Management. 

Pushing out the deadline to lift the debt ceiling could set the stage for a broader pact between Republicans and Democrats over federal spending and taxes. But economist Ian Shepherdson of Pantheon Macroeconomics expressed skepticism that such a compromise is possible given the partisan rancor on Capitol Hill.

"If the deal doesn't do anything more than postponing the debt ceiling deadline from Oct. 17 to six weeks hence, that doesn't mean we won't necessarily be facing the same thing five weeks from now," Luschini added.

Roberts also cautioned that, despite the day's euphoria over a possible debt ceiling agreement, the economy remains weak. "Economic fundamentals are deteriorating. If you look at the trends across all kinds of data -- unemployment, durable goods orders, industrial production, retail sales -- those trends all peaked in 2011 and 2012 and have been waning since then. It shows that the momentum in the economy is slowing down."

  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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