Here We Go Again: Debt Ceiling 2023

“The only way to stop the political outrage is not to play it.”  ~Carmine Savastano

We know many investors are worried about the ongoing development of the debt ceiling debate in Washington.  We have some thoughts given our experience with past debt ceiling crises, especially those in 2011 and 2013.  Unfortunately, this is not the first time this self-made “crisis” has occurred and will not be the last.

1. Washington most likely will not agree to an increase in the debt ceiling until the very last minute, there is no incentive for them to do so.  Constituents are glued to the debate; nothing gets people’s attention more than an impending possibility of a catastrophe.  Each side will take jabs at the other as long as possible as they use this opportunity to make headlines and posture for the next election.
2. Political uncertainty can often lead to volatility in the markets.  According to Bloomberg, the S&P 500 experienced a 17% peak to trough decline in the weeks before and after the debt deal was finalized in 2011.  The maximum drawdown in the equity markets was less than 6% in 2013.  This year the stock market has so far been nonplussed by the debate.  Do investors believe a deal must be made and therefore are not as worried as they have been in the past?  Is this nonchalant attitude toward risk welcome as investors have learned their lesson from history or will volatility pick up the closer we get to the finish line, as it has before?
3. Traders worry about short-term market moves; investors focus on the long-term.  As mentioned above, in 2013 the debt ceiling debate caused a decline of less than 6%.  For that year, the S&P 500 finished up 32%.  The lesson learned is those who jumped out of the market due to fears about the debt ceiling, and did not immediately jump back in, were not partakers in a very strong rally.

Investing involves risk and unfortunately politically self-induced crises are part of the investment environment.  We cannot say with 100% certainty that Congress will avoid defaulting on its debt payments again this time, but the resulting economic calamity would create a political comeuppance we believe politicians cannot ignore.  If the government drives the car over the cliff and pension and Social Security payments are reduced or temporarily stopped, we can offset the loss of income by increasing distributions to clients who need it. 

Investors are also on the lookout for recession.  The data coming in, as of late, has been comforting on this front.  Employment numbers remain strong, the unemployment rate is lower than it has been since the late 1960’s.  Inflation in the US shows signs of continuing to moderate and interest rates continue to decline as most investors believe the Federal Reserve has reached the apex of this rate hiking cycle.  There is no way to be certain, but the Federal Reserve’s odds of pulling off a soft-landing (lowering inflation while avoiding a recession) seem higher today than they did a few months ago.  We remain concerned that the issues with regional banks will reduce the amount of liquidity available to small businesses and this could cool the economy too quickly which could cause a recession.  Only time will tell, but we believe a recession by the end of 2023 seems unlikely unless there is an extraneous shock to the economy.

Long-term investors are relentlessly challenged with potential risks that create market volatility.  We continue to believe that portfolios appropriately diversified are the investors best opportunity to build and maintain wealth over time.  The noise around the debt ceiling will continue to get louder and scarier, as it did in 2011 and 2013.  In the end, we hope that wisdom and common sense will prevail; time will tell.

The Bond&Devick Team