Wall Street Wakes Up to Risk of Default

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is down 0.56% late in today's session as squabbling in Washington gets down to crunch time. If an agreement to increase the debt ceiling isn't reached by Thursday, the U.S. will default on its debt, potentially resulting in rising interest rates, plummeting stock markets, and widespread panic in the financial industry (more on why U.S. Treasuries matter here).

Over the past few days the market has paid little attention to the debate in Washington, assuming it will be resolved in the nick of time. But eventually even Wall Street has to realize that default is a possibility, especially when the Treasury Department is just hours away from running out of cash. It looks like that realization hit traders at about 2:25 p.m. EDT, when the Dow Jones Industrial Average took a turn for the worse.

^DJI Chart

^DJI data by YCharts.

On a positive note, while most of the market was panicking over a potential default, the energy industry has held up well today.

Energy stocks fight the plunge
One of only three Dow stocks in the green today is Chevron (NYSE: CVX  ) , which is barely above breakeven. Oil is down 1.2% today, and while you may think that's bad for Chevron, that may not be the case. Recently, Chevron's refineries have been a drag on earnings, so lower oil prices aren't necessarily a bad thing, as they may boost margins.

Unless the fallout from a potential default moves from financial instruments to the general economy, the energy business should be somewhat insulated. There will still be demand for oil and gas after a default, and the short-term hit to oil prices could actually boost results.

Supreme Court boosts coal stocks
The Supreme Court agreed to take up a challenge to the Environmental Protection Agency's CO2 emission regulations today, which has pushed coal stocks significantly higher. Walter Energy (NASDAQOTH: WLTGQ  ) and Cliffs Natural Resources (NYSE: CLF  ) are both up 4% today as investors project the possibility of more domestic demand.  

The irony is that most coal producers have moved on from the U.S. for demand or growth. U.S. coal-fired power plants are being shut down by the hundreds, and China is now where companies see growth in thermal and metallurgical coal demand.

While Walter Energy and Cliffs Natural Resources are both cheering the news today, the damage from the EPA may be done. Even if coal is allowed to be used more freely in the U.S., alternatives like natural gas and solar power are the real challenge for the industry, and they're not going away, even with less regulation.

Pockets of strength amid decline
The energy industry is a pocket of good news as the market crashes today. However, if there's no deal tomorrow, all bets are off. For everyone's sake, I hope that's not the case.

Don't get caught on the wrong side of the future of energy
New production techniques have changed the energy industry for good and left coal in the dust. Billions of dollars are being poured into shale and offshore drilling at a time when coal companies are losing money and going out of business. To help investors capitalize, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.

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Related Tickers

9/27/2016 3:05 PM
^DJI $18223.88 Up +129.05 +0.71%
CLF $6.05 Up +0.00 +0.00%
Cliffs Natural Res… CAPS Rating: ***
CVX $99.08 Up +0.30 +0.30%
Chevron CAPS Rating: ****
WLTGQ $0.04 Up +0.00 +3.80%
Walter Industries,… CAPS Rating: **