There is a lot of concern about the debt ceiling debate and how investors should prepare for all possible outcomes. We compare this process, which has played out many times in recent history, to sausage: the result is pretty good, but the process of getting there is off-putting to say the least.
We are not flippant about the risk; the brinksmanship makes us err on the side of caution. We also realize, however, that the U.S. government will have cash to pay interest on its debt even if the debt ceiling deadline passes without action. Their anticipated cash flow is enough to cover interest and key program (defense, Medicare, Social Security) payments for a while longer, but outside of those priorities, the government would be shut down. Hopefully, we do not even get to that point. If a deal is not reached by late May but there are negotiations in progress, we suspect that Speaker McCarthy and the House of Representatives would agree to pass a short-term debt ceiling increase to allow negotiations to play out. So far, no progress is reported, but importantly staffers for all parties are meeting and debating details. This is encouraging and part of the normal process.
For reference, the J.P. Morgan chart below shows the market reaction to similar debate in 2011. There was a short-term decline that recovered over a few months.
What are the priorities of the two parties? President Biden wants a ‘clean’ bill, but other Democrats are looking for tax increases to address spending concerns. (At this point our federal government is running annual deficits over $1 trillion. Both parties have failed to be fiscally responsible, and the long-term implications are worrisome.) Republicans are seeking a cap on discretionary spending, a retraction of unspent COVID funds, and energy-permitting reforms. A healthy debate should lead to a combination of objectives and a timely resolution.
The next month will be volatile. We are watching every development and monitoring the increased challenges facing regional banks and expectations for Federal Reserve interest rate decisions. Please call, email, or stop by to discuss any of these issues if you are concerned. We hope to provide you peace of mind knowing that we are staying on top of these matters so you can enjoy your summer plans. As always, we thank you for your trust and confidence. It is never taken for granted.