Should Investors Be Worried About The Debt Ceiling Drama?
In 2013, President Obama said, “We’ve got to get out of the habit of governing by crisis.” Then at midnight-thirty on October 17, he signed a bill into law that reopened the government. It was the end of a nearly 10-month standoff that saw National Parks shut down and government workers furloughed.
What was this standoff over, you might ask? The debt ceiling…
Our dear politicians have yet to follow President Obama’s sage advice.
That wasn’t the first time we’ve dealt with the debt ceiling, nor was it the last…
In 2011 the ratings firm Standard & Poor’s reduced the U.S.’s credit rating when Congress came close to not extending the limit. In 2019, we had another debt-ceiling debacle that was suspended under President Trump. And now here we are, facing the end of that debt-ceiling suspension four years later.
Now, I usually refrain from bringing politics into any of my analysis. It’s a losing proposition. But I’ve received a lot of questions recently about this debt-ceiling crisis, both from readers and friends and relatives. I’ve also seen questions about it on some of our message boards. So, I know it’s something top of mind for most people.
It also shows me that many people forgot that we’ve been here before and we’ll likely be here again sometime in the future.
Plus, stocks gyrate with each mention of the topic, and that, of course, affects us. So, I wanted to take a moment to cover the topic as best as I can. And touch on how it might dictate our trades and how we should prepare ourselves.
What Is The Debt Ceiling?
The debt ceiling is the amount the Treasury can borrow on behalf of the public. Raising or suspending that borrowing limit does not dictate how much the government spends. It allows the U.S. to pay what has already been approved.
As it sits now, the Treasury will hit its debt ceiling on June 5. That’s according to Treasury Secretary Janet Yellen as of Friday.
The uncertainty of whether a deal will be struck before the deadline is stoking fear and hesitation among investors. The broader market is down roughly 2% last week. Right now, it appears as if a tentative deal has been struck between President Biden and House Speaker Kevin McCarthy. But it still has to pass a deeply divided Congress in short order — which is no guarantee.
It’s nearly impossible to predict the effect a missed payment by the U.S. government would have on global financial markets. But it’s probably safe to say that almost all assets would rapidly lose value as investors lose faith in the global financial system.
Let us not forget that investor sentiment in our financial system is already on shaky ground with the recent bank failures. The silver lining is that the U.S. has never defaulted on its debt. I sure hope we don’t start now…
What Should We Be Doing?
It may sound obvious, but we need to be hyper-vigilant with our trades.
I know I sound like a broken record when I say this, but we have to keep our losses small. Follow our stops. Follow our rules. It’s way too easy to ignore a trade when it hits a sell signal. We simply log out of our brokerage accounts, hoping our trade will rebound.
But hope is not a strategy.
I know that it’s hard to close out a position for a loss. I know it’s tough to lose money on a trade. But what’s even worse is regret. The regret of not following your sell signals. The regret of not closing out a trade for a 10% or 15% loss, and now the trade is down 25%… 35%… even 50%.
Remember, a 50% loss requires a 100% return just to get your original investment back. That’s a deep, tough hole to dig out of.
But a 15% loss only requires an 18% return to get back even. That’s a heck of a lot more manageable.
So don’t try to outsmart the market. Our strategy of singles and doubles (which I talked about, here) continues to be our winning formula until we return to a bull market. In the meantime, we will pluck away at trades and maintain a healthy portion of our portfolio in cash.
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