Alert: Stock market plunges amid fears of US default.

Marco Damiani - 247 - Investing in company stocks on the São Paulo stock exchange is, so far, one of the worst investments of the year for investors. Judging by the Ibovespa, the index that measures the performance of the main stocks traded on the exchange, accumulated losses this year reached 15% yesterday. Someone who invested R$ 100 in January now has, according to the index variation, R$ 85. With yesterday's 1% drop in the Ibovespa, the stock market fell to the 50-point level, after 19 months of trading above 60 points. The worst, however, may be yet to come.

All this downward curve in the São Paulo stock exchange may just be a rehearsal for the real downturn to come. There's a general impression in the market that a sharp drop, caused by investors fleeing and selling securities at any price, could happen if the United States defaults. This hypothesis is becoming increasingly real. President Barack Obama and the Republican opposition in Congress simply cannot reach an agreement regarding raising the ceiling for federal public spending. The current limit of US$13,5 trillion will be reached, according to calculations by the American administration itself, on August 2nd. Without a new ceiling, the United States will simply cease, from that date, to honor its commitments to the market, such as redeeming bonds held by investors. US Treasury bonds will become, as they say in financial jargon, worthless – and then we'll see what a stock market crash is all about!

During the 2009 global crisis, trading on the São Paulo stock exchange fell to around 30 points, which, compared to today, represents half the daily trading volume. On the other hand, the dollar soared in value. In other words, the lesson the last global crisis taught the stock market is that many people flee from it in times of trouble, exchanging company stocks for paper money. Thus, those who hold onto stocks during a panic are stuck with the dud (that card nobody wants), while those who knew how to convert those same stocks into cash before the loss of value benefited. The problem is that, in a scenario of losses like the current one, selling stocks now is already a loss, judging by the Ibovespa index. The indication, from external factors affecting the stock market, that things could worsen, creates a vicious cycle in which most want to sell, few want to buy, and the value of the stocks depreciates. That's what's happening right now, with the stock market showing a 15% loss this year, always using the Ibovespa index as a benchmark. This loss is reflected in the performance of many funds managed by banks and brokerage firms based on the most traded stocks in the market. In other words, thousands of investors who have their money in funds that operate exclusively or partially with stocks are losing money.

Beyond the real possibility of a US default – Obama has even gone on American television to say that, without Republican support, he simply won't have the money to pay the social security checks of millions of citizens – there are also many uncertainties on the other side of the Atlantic. The sum of these uncertainties has pushed the global market down. Yesterday, for example, the Paris stock exchange closed with a nauseating drop of 3,7%. In addition to disagreeing on new aid to bankrupt Greece, the countries of the European Union also lack clarity about the financial health of Italy, Spain, Ireland, and other countries. Italy is the third largest economy in the eurozone, and if it collapses, its dragging force could be fatal for the common currency itself and the entire system of economic and financial constraints of the continent's countries. The plans for an economically strong and united Europe, capable of confronting its commercial rivals, the US and China, as well as the BRICS countries, would fail – and the new scenario, of a return to the atomization of the continent's countries, would bring even more fear to investors. They would withdraw, which would push the value of company stocks even further down.

In Brazil, despite the government's efforts to show that economic growth continues, the fear of a return to inflation, which would erode that growth, is real. The market fears it and, to protect itself, is already conducting fewer transactions. So much so that the 60-point mark is fading on the São Paulo stock exchange. Professionals, in this scenario, manage to get by by engaging in predominantly speculative operations – it is for this reason that the stock exchange itself is already showing a sharp increase in so-called 'intraday' movements, those in which the same investor makes more than one purchase and sale of the same stock on the same day, seeking to obtain the best value at each moment. Other investors, however, have a much greater chance of losing than of winning. The right thing to do is to remain vigilant.