Members of Congress and the Biden Administration are currently engaged in negotiations aimed at raising the U.S. debt ceiling, a legislative limit Congress imposes on the total amount of debt the U.S. Treasury can issue to finance the government’s obligations. Periodically, this limit is increased by an act of Congress as the government’s borrowing requirements expand. Failure to increase the debt ceiling in a timely manner runs the risk of the U.S. government defaulting on its obligations, which can have serious economic consequences.
Though anxiety-inducing for market participants, particularly as the theoretical deadline for default draws near, these events are not uncommon. Typically, they have come to pass without significant market disruption. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit. These increases have occurred under Republican and Democratic Presidents and Democratic, Republican, and split Congresses. Leaders in both parties have generally recognized the necessity of this process.
Treasury Secretary Janet Yellen has identified June 1 as the day the U.S. will be unable to pay all its bills. This week’s negotiations are centered on Republican demands for spending cuts in exchange for an increase in the debt ceiling. In the current political climate, investors are understandably nervous. However, our view is that the debt ceiling issue will be resolved in one of three ways:
- An agreement is reached before the deadline, in which case markets remain relatively calm. This is the current assumption of most investors. Congress has a long history of waiting until the last minute to address the debt ceiling before ultimately reaching an agreement.
- Congress and the Administration don’t agree prior to the deadline, but the Treasury is able to shuffle its spending to prioritize debt service and avoid a technical default. An agreement is subsequently reached, and default is avoided all together. We believe this would result in some panic on the part of investors, but a return to normalcy once a deal is made.
- The country defaults on its debt. In this case, markets could be severely disrupted. Both stocks and bonds would likely be hit. Recovery would take longer and the disruption in government spending could cause a recession. However, we believe the default state would be short-lived as Congress and the Administration would be forced into action. The impact on portfolio value would not be permanent.
We believe the odds of default and prolonged shutdown are low. Regardless, the best course of action is to stay invested in high quality stocks and bonds. Market timing is nearly impossible to achieve, and almost always results in permanent loss of value. Our companies have long histories of navigating economic crises and emerging on the other side. We are confident that this latest episode will be no different.
This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information in these materials are from sources Donaldson Capital Management, LLC deems reliable, however we do not attest to their accuracy.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Past performance is not a guarantee of future results. The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation by Donaldson Capital Management, LLC.
S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.