Debt has generally been an unpopular and contentious topic. Usually, lawmakers don’t like to be seen signing off on more federal borrowing or spending, but in the current environment, they don’t have much of a choice as debt is required to make good on promises already made in the form of passed bills and laws. However, with talks of the US government potentially defaulting in the coming weeks, action and compromises from both sides will need to come sooner than later.
What is the ‘X Date’?
The X date might sound like the show we used to watch for Simon Cowell’s witty comments, but in terms of budget, the ‘X date’ is when default would become a possibility if the limit on federal borrowing is not lifted. Since January, the US Government has been using extraordinary measures to keep making payments and avoid running up against the debt limit. If nothing is done, the ‘X date’ is projected for early June, leaving negotiators with a lot of work to do in the next couple of weeks.
What is going to happen?
Most likely this will take the form of raising (or suspending) the debt ceiling yet again, as has been done 78 times since 1960 (20 of them in just the last two decades). However, the US House of Representatives is currently stuck in a stalemate on how to handle the debt.
It’s important to remember, the US has never missed a debt payment. However, a US default would have serious negative economic implications for everyone. It is expected that the US economy would lose 8 million jobs, interest rates would rise further, and demand for US Treasury securities would fall as they would no longer be considered risk-free assets. It could be debated that a US default would cause the US dollar to no longer be the currency of global trade. We expect further market volatility as we approach the ‘X date’ with no agreement.
President Biden has been meeting with congressional leaders following negotiations. While there is still not a clear path to avoid default with just days until the ‘X date’, both sides seem to understand the importance of default avoidance. The longer it takes to reach an agreement, the fewer changes will be made as they run out of time to agree on broader policies.
What does this mean for investors?
It’s important for us, as investors, to remember that the debt ceiling negotiations will always create headlines. Investing is a long-term game, keep the focus on what you can control. The US debt ceiling conversation has regularly been in the news, but particularly loud since the 2011 fight when the country came dangerously close to a default with a standoff over spending (sound familiar?), and a credit rating downgrade by Standard & Poor’s on the nation’s debt for the first time ever. The S&P sold off 10% directly following the downgrade. Congress eventually reached a deal, and hopefully learned from that instance to not cut it as close. However, the lesson for us to learn is that if you held on to your long-term plan and didn’t sell into this panic, you were rewarded. The Dow is up over 200% since 8/8/2011 (the first business day following the downgrade to market close on May 23, 2023. The S&P was also up over 200%. While staying patient in times of turmoil is hard, it is most certainly the way to long-term success.
The bigger picture
While we will continue to closely watch the debt ceiling updates, we encourage you to concentrate on the bigger picture. From an investment standpoint, we expect balanced and well-diversified portfolios to weather any volatility, which should be short-term. From past budget impasses that ended in a last-minute agreement, like the one in 2011, markets were able to recover losses by year-end. Other market challenges, such as inflation, are making a positive turn. In times like these, alignment with your long-term goals and allocations is the most important.
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