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Past Debt Ceiling Dramas

May 18, 2023

Raising the U.S. debit ceiling continues unresolved as both sides dig in their heels.  We don’t know what the outcome will be but thought it would be prudent to take a look at previous debt ceiling confrontations of the past.

The worst standoff in recent history was 2011 when Standard & Poor reduced the United States’ credit rating from AAA (the highest) to AA+. It has never gone back to AAA. According to Capital Group political economist, Matt Miller, “It certainly has the potential to be at least as bad as 2011.” That is not good news.

Historically, markets decline for weeks or months but do recover. Miller continues, “I think the lesson from 2011, and a subsequent debt ceiling impasse in 2013, is that these events can disrupt markets for a while… but if we look at history, they don’t tend to have a lasting impact on investments. That’s assuming we get a reasonable resolution.”

So how should we view this phenomenon? As we usually saying if we can see trouble on the horizon (recession?), make sure you have the cash you need for your distributions over the next 12-18 months. Money market mutual funds and ultrashort term bonds are paying nicely, and let the remainder of your investment ebb and flow with the market as it continues to grow over time – despite the short-term fluctuations.

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