Don’t Be Fooled Again by the Debt Ceiling

For 16 days, investors heard how the government shutdown and the looming threat of the debt ceiling would wreak havoc on Wall Street. In reality, stocks have continued to rise despite the concerns.
Last Wednesday, Congress finally agreed to yet another last-minute debt deal. Less than 24 hours later, stocks were at new record highs. It didn’t take much. The S&P 500 had already risen 1% during the first 15 days of the shutdown, and advanced past 1,700 when optimism over a potential debt deal took hold of the market last Wednesday.
The government shutdown’s impact on the U.S. economy was profound. Close to 1 million federal employees were out of work for more than two weeks, taking an estimated $24 billion bite out of the economy.
On Wall Street, however, the impact was minimal. Despite some short-term uncertainty and volatility, the shutdown barely slowed stocks down on their way toward new all-time highs.
Perhaps if a deal to end the shutdown and temporarily avoid a default hadn’t gotten done at the 11th hour, the impact on stocks would have indeed been catastrophic. But we’ve seen this movie play out before. Lawmakers have made a habit of posturing and bickering in the weeks and months before a major debt deadline, only to cave at the absolute last minute and strike a deal.
We saw it in the summer of 2011 and we saw it last December with the January 1 fiscal cliff deadline looming. If you read the financial headlines leading up to those two events, you would have thought the apocalypse was coming to Wall Street. Instead, a deal got done at the last minute and stocks rebounded immediately.
It’s happening again this time. However, the temporary agreement to avoid default only finances the government through Jan. 15 and gives the Treasury borrowing power through Feb. 7. So yet another debt deadline is just months away. Some analysts are already predicting another doomsday scenario. Don’t listen to them.
No major Western government has defaulted on its debt obligations since Nazi Germany 80 years ago. The U.S. has come dangerously close to breaking that streak several times over the last couple years. But in the end, a deal got done.
That’s not to say a default couldn’t happen next time around. At this point, it would be foolish to count on our lawmakers, who routinely put their own self-interests ahead of the country. But it’s not worth letting the spoiled children in Congress dictate how you invest.
In just the last two years and two months, there have been two debt ceiling deadlines, one fiscal cliff and one sequestration deadline. During that time, stocks have risen 33% – an average of roughly 15% a year.
As my colleague Andy Crowder likes to say, you should “tune out all the noise.” Listening to all the sky-is-falling predictions on CNBC and reading countless doom-and-gloom headlines about debt ceilings will only cloud your vision as an investor. It’s important to invest in companies that you think will offer a healthy long-term return, regardless of market conditions.
Debt ceilings and government shutdowns are short-term problems for the market. Your portfolio would be better served by not getting caught up in them.
In the meantime, I want to hear from you.  What are your thoughts on the debt debate in Washington?  Should our country be aggressively taking steps to reduce our debt? Is it responsible for politicians to shut down our government and threaten default?  My email address is editorial@wyattresearch.com – please send me a note.

To top