Quick Facts:

  • Treasury Secretary Janet Yellen says it’s “highly likely” that the treasury will not be able to pay all of its bills as soon as June 1, known as “X Day.”
  • It remains unclear how the U.S. debt ceiling dilemma will be resolved or how it will affect investors.
  • A diversified mix of equity and fixed income investments, coupled with a long-term perspective, can help investors manage potential market volatility in the weeks and months ahead.

There has been very little movement in the standoff between the Biden administration and House Republicans over how and whether to raise the U.S. debt ceiling. Now, with just a week to go until Yellen believes the government could default, some Americans wonder if a resolution can be reached.

If you’re curious about the debt ceiling, you’re not alone. Brad Haverback, CFP®, a financial advisor in Savant’s Cedar Rapids, IA office, says clients have sought to educate themselves about the debt ceiling and its potential impact on the economy and their investments. “Some common themes include, ‘What is the debt ceiling? and, What type of market volatility could we see with an event like this?’” says Brad.

As we wrote earlier this month, the debt ceiling is a law that restricts the amount of debt the U.S. government can legally borrow to fund its operations. Those “operations” include Social Security, Medicare, military salaries, tax refunds, and payments toward our national debt. The U.S. reached its current debt ceiling of $31.4 trillion on Jan. 19, 2023.

The U.S. has never defaulted on its debt, so no one can predict with certainty what will happen if it does. That said, there are plenty of prognostications: The U.S. would become a risky borrower and would have to pay higher interest rates. Government workers might not get paid. Companies with government contracts may begin laying off employees. Social Security benefits would not be paid. The list of potential disasters goes on and on.

“Most clients I’ve talked to aren’t worried about the long term, but they are wary of the short-term effects of a possible default and are preparing accordingly,” says Daryl Dagit, CFP®, CRPS®, CEP®, a financial advisor and market manager in Savant’s Peoria, IL office. “A few are shoring up their cash in their emergency funds, or for vacations or home projects this summer, just in case of market volatility.”

In terms of the markets, the debt limit negotiations are just one of many factors that can affect securities. That’s why Dimensional Fund Advisors (DFA), which has a long history of applying academic research to practical investing, says predicting likely scenarios is unproductive, given that markets have priced in the potential range of outcomes. DFA reminds us that market volatility is a part of investing, and that facing uncertainty is why investors earn risk premiums.

We believe global diversification and a long-term view can help investors ride out periods of uncertainty. Instead of reacting to the headlines with emotion, investors should focus on what they can control, says Jeremy Joseph, CFP®, ChSNC®, a financial advisor in Savant’s Lincolnshire, IL office.

“Markets go up and down,” says Jeremy. “If the U.S. defaults, companies – both in the U.S. and abroad – will remain steadfast in their aim toward profitability and long-term growth, and to protect their capital. Just as companies will, investors should stand their ground and allow short-term fluctuations to occur without deviating from their long-term plan. Control what you can control. And when it comes to markets, the only thing in your control is your own emotions and the actions you take because of them,” he adds.

What will happen between now and X-Day remains to be seen, but polling released by CNN and SSRS showed 60% of Americans believe Congress should only raise the debt ceiling if it cuts spending at the same time, and that 45% believe failure to raise the debt ceiling would cause “major problems.” Stay tuned.

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