On August 26, Treasury Secretary Jack Lew sent a letter to Congress warning them that the U.S. will likely reach the debt ceiling by mid-October. He noted that if Congress doesn’t raise it, the financial implications could be adverse for our economy and potentially the global financial system.1
The first thought for many investors is, “here we go again.” As frustrating as these political battles might be, over the past couple of years the debt ceiling debate in Congress hasn’t had much impact on the direction of the stock market, which has been trending higher.
Will this time be different? What does the debt ceiling debate mean for your portfolio? A look at history might help us address these questions.
The Debt Ceiling Debate Has Been Going On For Over 75 Years
The debt ceiling debate is not a recent phenomenon, nor is it unique to any one political party. Since March 1962, Congress has changed the debt limit 77 times, and since the late 1950’s Congress has raised the limit every year, with the exception of fiscal year (FY) 1969 and between FY 1997 – FY 2001. More recent changes to the debt ceiling came through the Budget Control Act of 2011, under which the debt ceiling was raised on three separate occasions. The most recent change came in May of this year, when the debt limit was set at $16.669 trillion, where it stands today.2
Unfortunately, the media seems to make a much larger deal of this debate than necessary, especially since the U.S. Government has been raising the debt ceiling now for over 75 years. Regardless, it’s a central issue in the public sphere today, and it has the attention of many investors.2
How Will the Debt Ceiling Debate Affect the Stock Market?
We believe the upcoming debt ceiling debate is largely just noise for the stock market, and the resolution should play out as it has in years past - with both sides reaching some form of a deal to raise the ceiling.
To be sure, the market may experience some volatility along the way due to the uncertainty surrounding the debate in Congress, but we believe it should be short-term. The last time the debt ceiling debate reached this scale was in summer 2011,3 and during that time the stock market experienced a short-term correction - but it didn’t last very long. Since then, the market has continued a strong climb, and now trades at a significantly higher level than it did in the summer of 2011. The debt ceiling debate caused a minor hiccup, but didn’t change the longer-term trajectory of the market.
What the Debt Ceiling Debate Means for Your Portfolio
As mentioned above, the uncertainty surrounding the debate could lead to some short-term volatility, but we don’t believe the medium to longer-term trajectory of the markets or the economy should be seriously affected. This is assuming Congress reaches a deal and raises the debt ceiling as they have in the past.
There is a chance, however, that Congress may not reach a deal, which could in turn potentially create an extended period of volatility in the markets. As part of a comprehensive financial plan, and to prepare for the unexpected, investors may want to consider allocating a piece of their diversified portfolio to a strategy designed to limit downside during prolonged market downturns.
To learn more about various money manager strategies or to review your current portfolio allocation, please call one of our Wealth Managers at 1-800-541-7774.
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