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Debt showdown: Why Wall Street might be more worried than it appears

The debt limit showdown appears to be coming down to the wire, but Wall Street has so far shown few signs of panic. But there are reasons for the wait-and-see attitude.

You鈥檇 be forgiven for thinking that Wall Street is fiddling while Washington burns.

Here we are, two days before a debt-limit deadline that the US Treasury has pegged as a 鈥渃atastrophic鈥� risk for the economy, and the Standard & Poor鈥檚 500 stock index is not far from its all-time high.

The Dow Jones Industrial Average spent Tuesday above the 15000 level where the index has essentially hovered since May.

Are investors disagreeing with Treasury Secretary Jack Lew? Do they think it鈥檚 no big deal if Congress fails to raise America鈥檚 debt limit by Oct. 17?

No. The apparent equanimity on Wall Street doesn鈥檛 mean that traders lack awareness of what鈥檚 at stake 鈥� basically that the government needs new borrowing authority or it soon won鈥檛 be able to meet all its financial obligations.

The stock market is priced for what investors think will happen 鈥� a last-minute deal to raise the debt cap 鈥� not for the bad news that might happen.

Yes, the deadline is dangerously near, but there are still those precious two days to go.

鈥淐learly, this is not a market that expects a default to occur鈥� by the US Treasury, says David Joy, chief market strategist at Ameriprise Financial in Minneapolis.

鈥淲e have become inured to these episodes over time, and have come to expect last-minute resolutions,鈥� he writes in a new commentary on the market鈥檚 behavior. 鈥淩eportedly, progress toward a deal is being made, albeit slowly. But we will all breathe a little easier when it is finally in hand.鈥�

The last point Mr. Joy makes is vital.

Investors aren鈥檛 taking the antics on Capitol Hill casually. When a standoff in Congress took the nation near the brink of default in 2011, after all, the economy鈥檚 growth took a hit even though the debt limit ended up being raised in time.

And there鈥檚 no guarantee that the current fiscal clash will end that smoothly.

If it starts looking as if 鈥済etting to yes鈥� is doubtful, that won鈥檛 be greeted with yawns on Wall Street.

Already, the budget impasse that resulted in a partial federal shutdown is having negative effects on economic growth and consumer confidence.

But for stock traders, the risk of a new financial crisis 鈥� the danger that Secretary Lew warned about 鈥� needs to be balanced against another risk: You could sell stocks today to be 鈥渟afe鈥� and then watch share prices rally when a deal gets done.

Beyond the fiscal disarray in Washington, the US economy has been generally improving 鈥� and luring investors who see growth slowing in emerging-market nations such as China and India.

Many investors are banking on a climate of steady economic growth, even if the current impasse gets resolved by simply setting the stage for another budget showdown in the new year.