As Washington moved closer to a deal on lifting the debt ceiling and ending the shutdown, stocks rose yesterday to their highest level since September, but that was an "emotional reaction" and it's too soon to assume the government can avoid a default, experts said.
The Dow Jones industrial average rose 111 points yesterday, after hitting its biggest gain of the year Thursday, an increase of 323 points. Earlier this week, the Dow dipped below 15,000, reacting to speculation that the government could default on its debt.
Yesterday, the big boost was news of proposals from both House and Senate Republicans offering to reopen the government and raise the debt ceiling as well as "constructive" talks between the two sides, as Obama's press secretary Jay Carney put it.
"This whole thing is an emotional reaction," said Christine Armstrong, vice-president at Morgan Stanley in Boston of the gains on Wall Street. "It is based on a rumor that Congress is going to do their job, and why would that be good news?"
Kim Forrest, an equity research analyst at Fort Pitt Capital Group in Pittsburgh, said nothing is guaranteed.
"That's super that they're talking to each other, but what on Earth is the agreement going to look like, and is it going to stave off default? I don't think we know that yet," Forrest said. "I think the stock market is getting ahead of itself."
House Majority Leader Eric Cantor said Republicans were still waiting to hear from the president on the proposals that included easing across-the-board spending cuts and changes to Obamacare.
Still, Carney said the president has some "concerns" with the proposal. Republican leaders said talks would likely continue.
Armstrong said if there is no deal when Wall Street expects, the effects could be significant.
"There's still a lot of land mines out there," she said.
The shutdown, said Armstrong, must be resolved as soon as possible to avoid long-term damage to the economy.
"We expect that people may lose a fifth of their 401ks if this continues to play out badly," she said.
Economic growth and holiday shopping also could be significantly hurt by a shutdown that lasts much longer.
Gov. Deval Patrick, in a letter to state employees, said layoffs for federally funded positions were "not imminent," but said the state is still trying to determine when it may have to take action.
Herald wire services contributed to this report.
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