Brinkmanship challenges investor resolve
By Kyle Tetting
We’ve been through this before. In July of 2011, Bob Landaas shared his thoughts on Congress’s hesitation to raise the debt ceiling. As Bob commented then, “My respect for politicians continues to sink by the day.”
In simple terms, the debt ceiling is a statutory limit on the amount the United States Treasury can borrow. That borrowing is done to keep the government solvent, meeting all the liabilities and assuring investors in U.S. debt that maturing Treasury bonds can be repaid.
The debt ceiling isn’t an authorization to spend new money. It’s an authorization to pay for past commitments made by presidents and Congresses from both parties.
Since 1960, we’ve agreed to raise or amend that limit 78 times because failing to do so would lead to meaningful economic consequences. With a likely deadline of early June this time around, we’re again counting on politicians to come together to address the obvious need.
Importantly, it’s rare that the government plays much of a role in our outlook for the economy and markets. More than two-thirds of our economic activity comes from consumption. Consumers don’t make a decision on buying a home, replacing a car or going on vacation based on who is in office or what issues are currently in play. The challenge is that political uncertainty captures the headlines and weighs on our minds. Despite 60 years of history, it always feels like this time is different.
Aside from that uncertainty, the first few weeks of 2023 aren’t pointing toward major concerns of economic calamity. It’s not that big-money investors aren’t paying attention. They continue to expect that despite all the gridlock and infighting, Congress will take the necessary steps. There’s plenty of time for the talk to escalate between now and June, but at this point, few think the threat of default is real.
One sign: The yield on the 10-year Treasury, which Bob pointed to in 2011, has fallen to start 2023. If lenders to the U.S. government suspected default was likely, they’d be demanding a premium to own U.S. government debt. That interest rate has risen markedly in the last year, but it pre-dates the current debt ceiling debate. The rate rose in response to spikes in inflation.
Another tell: Investors have not been fleeing from risk assets. To the contrary, the S&P 500 rose 4.6% in the first 15 trading days of 2023. While that’s only three weeks, neither stock prices nor expectations of stock market volatility point toward meaningful concerns over the debt ceiling.
In short, with months until the controversy becomes a crisis, investors remain confident a deal will be reached. Still, it adds one more item to the list of things to watch across the next few months, including concerns over inflation and the Fed, moderating corporate earnings, and fears of a recession. As a result, we need to continue to ensure our ongoing conversation on balance reflects the ever-changing landscape.
In 2011, Congress raised the debt ceiling just one day before the government was expected to default. Debate this time seems likely to push into the final days as well.
In the end, that possibility may well serve as another reminder that many of the best opportunities are bred in uncertainty and our commitment to balance gives us the resolve to stay the course and benefit from those opportunities.
2022 Investment Outlook Seminar, a Money Talk Video with Bob Landaas and Kyle Tetting
Separating politics from portfolios, by Joel Dresang
Making financial sense of “breaking news,” a Money Talk Video with Art Rothschild
Focus on fundamentals to face volatility, a Money Talk Video with Steve Giles
(initially posted Jan. 30, 2023)