Debt Ceiling Decline?
Although markets are up for the year, with the S&P 500 posting a gain of 7.5% for the first quarter of the year and up almost 15% since the recent lows in October of 2022, this week looks like it could show a slight decline. And we are definitely seeing a risk-off move, as more defensive sectors, like utilities, health care and consumer staples are outperforming in most of the trading sessions of this month.
We are wondering if the looming debt ceiling debate might be on investors’ minds. So, what is the debt ceiling and why would it matter?
The debt ceiling formally was created in 1939 by Congress with the Public Debt Acts. It has been amended and raised many times since, usually without a lot of fanfare. At times, however, it is used as a weapon to try and put a limit on government spending. The problem is government spending is decided by the congressional budgeting process. The debt ceiling isn’t tied to that process. Instead, it limits what treasury can do to actually make that budget a reality.
There is a lot of talk about a government default. That has never happened before and we believe the likelihood of a default is miniscule. What has happened in the past with debt ceiling showdowns are two major things that are market negatives.
The first is a government shutdown. There are parts of the government that are deemed essential and don’t shut down but things like the park service, which is non-essential, can be shut down. And that acts as a signal that things are not right.
The second negative would be a credit ratings downgrade. We last saw this in 2011, when US debt was downgraded and investors reacted very negatively. Downgrades cause interest rates to spike and in the current environment, where the expectation is that rate increases will be slowing, stopping or even turning down, a spike in interest rates would be a big negative event.
Our belief is that the debt ceiling debate in Congress could go to the last minute, but it will likely be resolved before either a shutdown or a downgrade occur. Still, surprises can happen and we believe investors should be cautious.
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The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.