Stocks Are ‘Stuck’ Amid Debt Limit Crisis — But These Investments May Be Best Amid The Turbulence


Stocks may be in line for notable swings over the next few weeks amid the simmering standoff in Washington as the U.S. nears the first default in its history, according to several experts – though there are several investments that may prove wise during the turbulence.

Wall Street will be paying particularly close attention to the Beltway over the next few weeks. AFP via Getty Images

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Wall Street will be paying particularly close attention to the Beltway over the next few weeks. AFP via Getty Images

Key Facts

“We expect the debt showdown to stoke market volatility,” a Jean Bolvin-led group of BlackRock strategists wrote in a Monday note, warning investors to remain “cautious” as the U.S. is on the brink of becoming unable to make debt payments as it hovers at its $31.3 trillion ceiling.

There’s no “cushion” for the U.S. to fall back on thanks to elevated inflation and interest rates, explained the BlackRock group, as the federal government and Federal Reserve are largely handcuffed in their monetary policy responses while the economy already flirts with a recession thanks partially to the Fed’s tightening campaign.

The BlackRock note named one top pick for patient investors to earn “attractive income” amid the standoff: Short-term U.S. Treasury notes which tend to pay higher yields in times of increased instability in Washington and would likely rise should credit agencies downgrade the U.S.

Bank of America credit strategist Yuli Seliger identified Yankee bonds – debt holdings issued in the U.S. by foreign entities – as the top “hedge against the worst-case scenario” should the debt crisis rage on past expectations.

Morgan Stanley’s top U.S. strategist Michael Wilson wrote to clients Monday that though the debt ceiling fiasco is “an important part of the market mosaic,” asset performance during prior standoffs in 1996, 2011 and 2013 offer limited patterns, though on average technology, healthcare and consumer staples stocks performed the best in the months following a resolution to debt negotiations.

Crucially, Wilson identified a lifting of the debt limit, the likely eventual solution to the crisis, as a far from a happy case for long investors, saying it could “tip” the S&P 500 toward his bank’s bearish case for the index of 3,500, a 15% crash from the S&P’s Monday level of about 4,130.


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Crucial Quote

“The stock market is stuck until we reach a debt ceiling resolution,” UBS financial advisor Brad Bernstein wrote in emailed comments. The Dow Jones Industrial Average has moved by less than 0.2% during five of the last six trading sessions; the index gained or lost less than that benchmark in less than 20% of the prior days this year when the market was open. Major indexes were little-changed Monday, with the Dow and the S&P gaining 0.1% and 0.2%, respectively.

Big Number

45%. That’s how much President Joe Biden’s top economic policy advisors said the stock market will decline in the third quarter of 2023 should the U.S. fail to meet its debt payment requirements, according to a May 3 blog post (the methodology for this brash claim was not stated).

Chief Critic

House Speaker Kevin McCarthy (R-Calif.) accused Biden and his Democratic allies of seeming “more like they want a default than a deal” after failing to gain traction during talks over the weekend. The McCarthy-led Republican lawmaker coalition has sought to tie any agreement on raising the debt limit to passing more austere government spending measures.

Further Reading

Wall Street is strangely calm about the possibility of the US defaulting on its bills (CNN)

Here’s Why The Debt Limit Matters—And How An Accidental Default Could Spark A Recession (Forbes)

McCarthy: Biden Wants A Default—Not A Deal—On Debt Ceiling (Forbes)

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