If this all sounds scary, that’s because it is. A government default is a serious matter with real, negative consequences. My colleague, Nick Maggiulli, wrote an excellent explainer earlier this week. And yet, the stock market appears unphased by this impending doom. The S&P 500 Index has been trading in a narrow range for the past six weeks.
I was with Wharton’s Professor Jeremy Siegel two weeks ago, at a CFA Insitute conference on asset and risk allocation. As I was thumbing through audience questions to ask him, he interrupted me to see if anyone asked about the debt ceiling because, in his words, you should be asking. His response calmed my anxiety over the matter. He likened the debate to a game of chicken.
For some reason, I cannot tell this story without envisioning Kevin Bacon playing chicken on that tractor in the movie Footloose.
Siegel was adamant that the U.S. will not default and said that if either party fails to swerve in this proverbial game of chicken, it would present a massive opportunity. “Buy stocks, buy Treasuries, buy anything the trades off in that scenario”, he said.
And while I am not clamoring for such a buying opportunity, I do agree that the U.S. will not actually fail to pay its bills, despite the seeming willingness of some of the more radical leaders on Capitol Hill. However, it is possible that Congress will miss the June 1st deadline if neither side blinks soon. The legislative mechanism for passing a bill on the House floor without support from the Speaker takes several weeks, and that process hasn’t yet started. I seriously doubt that the President will invoke the 14th Amendment, as it is certain to be challenged in court. I think this game of chicken will come down to the wire.
Having lived through the 2011 debt ceiling debacle, I am personally annoyed by the whole concept. The time to debate spending is during the budget negotiation, not after the spending has been approved by Congress. I am no policy expert, but it seems reasonable to tie the debt limit to the budget when passed. Otherwise, it’s like taking a vacation, then refusing to pay the hotel bill at checkout.
In short, the news cycle may be dominated by this story in the coming weeks. You can bet on flashing red headlines and alerts. Although the market has been quiet so far, volatility may increase as we draw nearer (or past) June 1st without a resolution. The U.S. has the ability to pay its bills if we would only allow ourselves. And most likely, no one of this should factor into your long-term investing plan.