The Dow Jones Industrial Average tumbled more than 4 percent this week, pressuring retail stocks as Washington lawmakers failed to reach a budget compromise that would raise the nation’s debt ceiling and avoid a potentially catastrophic default.

Although talks are getting down to the wire and the government is set to start falling short on some of its bills as early as Tuesday, investors are still relatively sure an arrangement will ultimately be reached.
The Dow slipped 0.8 percent, or 96.87 points, on Friday to 12.143.24, a drop of 4.2 percent for the week.
The S&P Retail Index managed a slight gain to cap off the week and month, perking up 0.1 percent, or 0.78 points, to 539.16, but the broad measure of retail stocks fell 1.8 percent for the five days of trading. Gold hit a new high of $1,633 Friday as investors sought shelter from volatile equity markets.

For all of July, the Dow lost 2.2 percent, although retail stocks rose 1.7 percent. Retail stocks were buoyed by some positive early reads on the second quarter and sales reports that indicate the luxury and midtier consumer are still spending.

But the sputtering economic recovery has pressured markets. The Commerce Department’s early read on gross domestic product showed the economy grew at a rate of 1.3 percent in the second quarter, slower than the 1.7 percent economists projected, and the Thomson Reuters-University of Michigan Surveys of Consumers showed that confidence fell to its lowest level since early 2009 in July.

“Consumers continued to view their finances in quite bleak terms, both for the year ahead as well as over the next five years,” said Richard Curtin, chief economist for the Surveys of Consumers.

The second half is generally expected to be stronger, but all bets are off if the U.S. defaults on its debts. A default could boost interest rates, shake confidence in the U.S. financial powerhouse and spark another crisis.

“There’s a one in maybe 100,000 chance of an actual default,” said James Smith, chief economist of Parsec Financial Management, who noted lawmakers could still push the Tuesday deadline back a bit and that Treasury bonds don’t start coming due until Aug. 15.

Smith said the economy should pick up by 3 percent or more for the rest of the year.

Strong growth, he said, would “renew confidence, increase job opportunities, increase retail sales, increase orders, which would increase industrial production, and we’re back in a virtuous cycle again.”

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