Should Investors Worry About the Debt Ceiling?
President Biden, House Speaker Kevin McCarthy, and other top lawmakers have been negotiating to determine how and whether to raise the nation’s debt ceiling. As expected, both sides appeared entrenched in their positions, even as Treasury Secretary Janet Yellen warned that without more borrowing, the U.S. will not be able to meet all of its financial obligations as soon as June 1.
What is the debt ceiling, anyway, and why is it important? The debt ceiling, also called the debt limit, is a law that restricts the amount of debt the U.S. government can legally borrow to fund its operations, including Social Security, Medicare, salaries for the military, tax refunds, and payments to defray the national debt. Congress is responsible for setting the debt limit, and once the debt reaches that limit, the government is not allowed to borrow any more money until the limit is raised. The current debt ceiling is $31.4 trillion, which the U.S. reached on Jan. 19, 2023.
According to the U.S. Treasury, Congress has acted 78 times since 1960 to permanently raise, temporarily extend, or revise the definition of the debt limit. These changes have occurred 49 times under Republican presidents and 29 times under Democratic presidents. While both President Biden and Senate Minority Leader Mitch McConnell have both stated that the U.S. will not default on its debt this time, Republicans and Democrats remain very much apart on whether an agreement to raise the debt ceiling should come with sweeping spending cuts, tax increases, or no conditions.
Potential Implications for Investors
In recent years, raising the debt ceiling has become an increasingly contentious issue, with Republicans using the threat of a government shutdown or default to extract spending cuts or other policy concessions from Democrats. This has led to several high-stakes showdowns in Congress, including the 2011 debt ceiling crisis, which led to a downgrade of the U.S. credit rating, and the 2013 government shutdown, which cost the economy an estimated $24 billion.
Should investors be worried this time? While anything could happen, it’s important to know that the U.S. has never defaulted on its debt. Despite a lot of political brinksmanship and dramatic news headlines, the government has always reached an agreement, if sometimes at the 11th hour. As Savant’s Chief Investment Officer, Phil Huber, told Barron’s recently, “It seems a bit like Groundhog Day in that we end up having this conversation every few years.”
Speaking of Groundhog Day, recent bank failures also keep popping up in the news. A recent study by Gallup found that nearly half of Americans are anxious about the safety of the money they have in banks or other financial institutions.
However the debt ceiling situation gets resolved, Morningstar predicts we could see some market volatility in the meantime. What can you do to protect your nest egg? Remember these Savant investment maxims:
- Fear, greed, indifference, impatience, poor discipline, and lack of complete information are an investor’s worst enemies. We’re likely to see headlines, predictions, and other fear-inducing news in the coming days, but making decisions based on emotions rarely serves investors well. If you jump out of the market, you could see losses if Congress decides to increase the debt ceiling.
- Broad global diversification increases portfolio return and reduces overall portfolio risk. We believe global diversification should be a key part of any long-term investment strategy. Having a portfolio that includes stocks and high-quality bonds, as well as having a cash cushion for short-term or emergency needs can help you weather periods of volatility.
- Successful long-term investing requires maintaining a comprehensive and strategic investment plan. This is where working with a financial advisor can be advantageous. A fiduciary advisor who understands your long-term goals, immediate and future needs, and appetite for risk can help you develop a comprehensive financial plan designed to withstand short-term volatility. If you already work with a Savant advisor, regular communication and portfolio reviews can help you maintain perspective and stay on track.
These are just a few of the maxims developed by Savant since it began managing investment portfolios in 1993. To read the full list, click here. If you’d like to learn about more best practices for volatile markets, download our guide, “Maintaining Your Sanity During Market Volatility.”
