The U.S. Economy and Debt Ceiling Debate

The U.S. Treasury estimates that without further borrowing, the government will run out of money around August 2, 2011, and has given this date as a deadline for Congress to raise the debt ceiling. This is a newer source of short-term uncertainty for the markets. As with the Greek situation, I think the most likely outcome is a political agreement that avoids a near-term market upheaval. This could provide some very modest upside to the stock market and other “risk” assets and have little effect on bonds. But the longer-term structural problem with our debt and deficit will likely remain unresolved, and possibly won’t be seriously addressed until after the 2012 presidential election. (I hope I am not being optimistic in thinking that it will at least be addressed at that point.) There is also a chance the two sides don’t reach an agreement and the debt ceiling is not raised by August 2. If this happens, I’d expect a sharp negative market reaction until an agreement is reached (which we expect would be quickly forthcoming) followed by some recovery.

I view this as a nasty, but short term, investment risk. As stated above, I feel that an agreement will be reached, if not before August 2nd then very shortly thereafter when congress realizes the damage they will have done by not reaching an agreement in a timely matter. Either way, post agreement, we end up in the same position, and all else not falling to pieces (Euro Zone Debt, China etc.) so should the markets.

Investors should review their portfolios with their advisors and gauge the impact of a short term severe correction in stocks on their portfolio. If the prospect causes concern, then perhaps a more conservative asset allocation is warranted.

The above commentary is the opinion of the author and should not be construed as investment or tax advice. Always consult a qualified investment and/or tax advisor before investing or changing investments.