Past debt ceiling negotiations in previous years have followed a similar pattern in that the market remains volatile until Congress eventually realizes the importance of paying the bills for the expenses it has already passed into law. That said, each negotiation is different though this time, both parties have acknowledged that defaulting on the nation’s debt is unacceptable.
My baseline assumption is that negotiations will go to the brink and well into June before a compromise is reached. Should that not occur however, and the nation decide to not pay the interest owed on the treasury bills it has sold (which are theoretically the safest “risk-free” debt in the world), one could expect treasury bond prices to fall significantly (and yields rise dramatically) while the stock market also sold off. As has been the case in past events in which Congress has acted stupidly (i.e. not initially approving a bailout during the financial crisis), the market effectively forces Congress into making the right decision as Congress and the President eventually recognize the importance of taking action.
As negotiations drag on, fully expect more volatility in the market which will also cause some strain on the economy as both individuals and corporations never like uncertainty and tend to restrain spending and investment. As was the case with my communications on the banking crisis, in which I believed it would be a limited event and not broader contagion, the debt ceiling volatility may give us a long-term opportunity to purchase companies (or buy more shares of our current companies) at a discount.
The larger concern to me remains inflation and I believe the Federal Reserve may well need to raise interest rates further to dampen prices unless the nation fall into a recession, or the debt ceiling or banking crisis broaden in severity, which would effectively do the job for the Fed as prices fall.
With all of these risks and concerns, the market has remained relatively resilient this year, producing slight gains for our portfolio. However, most of the broader stock market returns have come from a handful of highly priced, no/low dividend, mega-cap technology companies as investors have again moved into this momentum trade. We of course will never speculate on such overvalued companies instead focusing on durable businesses, selling at reasonable valuations which pay our clients a dividend to weather the potential storms ahead.
As always, please don’t hesitate to call or email us with any questions and enjoy your Memorial Day weekend!
With warmest regards,
Jim
P.S. As an aside to this discussion, I did publish a blog a few years ago which addressed the nation’s debt in which you may also find of interest which you may access by clicking on the following link. https://altrius-capital.com/blog/is-america-going-broke/.