Debt Ceiling worries

Paul Martin | May 30, 2023

The debt ceiling, bank failures, recession on the horizon?

There are plenty of things for investors to worry about in 2023! The debt ceiling debate is at the top of the news cycle now, but earlier this year it was Silicon Valley Bank and other banks failing, and constant concerns about the economy falling into recession.

The federal government needs to address spending – we’re on track for a $1.5 trillion deficit this year. Spending more than we bring in is a problem because the national debt keeps growing and interest payments now consume about 8% of government revenue. Estimates are for that to reach 14% of revenue by 2033. (1) That borrowing will likely reduce future economic growth and force a choice between higher taxes or lower government spending.

The question isn’t whether the government can pay its bills now – it can. The U.S. can still borrow money cheaply to pay its debt – U.S. government bonds are rated the safest in the world and long term interest rates are still low, about 3.7% on a 10 year bond (2).

The debt ceiling is an arbitrary number (currently $31.38 trillion) set by Congress and raising it involves politics. Politicians don’t want to let a crisis pass by without a chance to use it for their benefit and will likely push an agreement right up to the June 5 deadline, or even past it.

In the short run, this might create volatility for stocks. During a similar debt ceiling impasse in 2011, the S&P 500 index dropped almost 20% in 2 months while politicians pushed the issue and delayed reaching an agreement. But stocks and bonds rallied strongly once the debt ceiling was raised in 2011, even after US government bonds were downgraded by ratings agencies. The ten years after 2011 produced consistent gains in U.S. stocks. (3)

It is certainly reasonable to worry about the national debt, but changing your investment strategy because of it is not a great decision and might cost you in the long run.

What about the banks? The FDIC insures all bank deposits to $250,000 per person or $500,000 per joint account at each bank. (4) With this government backing, most of us won’t have an issue personally if our bank has a problem like SVB. The bigger issue is insuring business accounts that may hold hundreds of millions.

There are proposals for the FDIC to insure these “transactional” business accounts to much higher levels, which makes sense to me. Businesses need to know the cash they use for payroll and expenses is safe. If smaller banks keep losing deposits to bigger banks we shift the risk to “too big to fail’ banks and create less choice and competition between banks.

It will require an act of Congress to increase the FDIC insurance limits – more politics involved. But hopefully Congress will act for the better and shore up confidence in the banking system.

Isn't a recession coming? We’ve been waiting since January, 2022 for a recession to hit. Some economic indicators are pointing to recession – an inverted yield curve, the Fed raising interest rates, increasing jobless claims, slower consumer spending.

But the economy has been very resilient. Estimates are for 2.9% growth in the current quarter (5) and the unemployment rate is 3.4%, neither of which indicate a slowdown (6). Maybe the Fed rate increases will eventually slow the economy and increase unemployment enough that we fall into recession.

However, markets look forward, not backward. Stocks will likely bottom and start to go up anticipating better times even if current economic news is bad and a recession does start. This might have already happened – the October 2022 lows in stock prices have held and stocks are up this year measured by the S&P 500 index.

Timing out a recession is difficult, if not completely impossible. Legions of economists are no better at predicting recessions than meteorologists are at predicting the weather.

There’s an old saying that stocks have a way of climbing a “wall of worry” – the tendency for investors to look past immediate concerns and focus on the positives. The wall of worry does look imposing but investors are wise to stay invested for the long run.

The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy
or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on
sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

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