Market Reactions and Investor Perspectives Amid the Debt Ceiling Debate

While there is plenty to discuss regarding what is happening in the stock market and the economy, much of it consists of the same actions and reactions that we’ve been talking about for a year and a half.

It started at a time when the government was distributing excessive money to sustain the economy during the Covid shutdowns. This was also a time when the supply chain was broken, resulting in high demand for limited products. When demand outpaces supply, inflation often occurs. During this time, we watched the Federal Reserve label the inflation as “transitory.”

In the past two years, inflation has remained above 4%, reaching as high as 9.1%. Only in the last 14 months has the Fed increased the Federal Funds Rate from near zero to 5.0% – 5.25%. Furthermore, over the last year, Wall Street was aware of the Fed’s intentions as the rate hikes were clearly communicated. Now we’re transitioning into a period where the Fed’s actions are more data dependent, and this has been reflected in recent market volatility.

The stock market is factoring in interest rate cuts in the next year; however, some members of the Fed have indicated there is still work to be done and that there may be another rate hike or two before year-end.

Our country has also reached the debt ceiling, which is the maximum amount the U.S. government can borrow, including interest owed to investors who purchased Treasury securities. In actuality, the United States hasn’t balanced its budget in nearly 30 years. In that time, we’ve had two unfunded wars, three recessions, a global pandemic, and three rounds of tax cuts. Clearly, the United States has a spending problem.

While the United States has hit the debt ceiling before, we’ve never seen a prolonged government closure or a default on Treasury securities. Both sides of Congress have explicitly stated that they will not permit the U.S. government to default on its obligations. We believe a resolution will come to fruition, but the details are uncertain. Are we moving toward lower inflation expectations, and how would that interplay with the Fed? If we were to practice a little more fiscal austerity, maybe the Fed wouldn’t have to do as much to control inflation.

Inevitably, the market volatility of late has been a response to the debt ceiling debate. Should investors worry? While the U.S. debt is a serious issue, your investment strategy should be based on your long-term goals and risk tolerance. It is generally wise to stay the course during political conflicts. Regularly adding to your accounts that are designed for long-term goals can help mitigate the emotional impact of market swings. Remember, a basic principle of investing is that buying during a downturn may aid the growth of your portfolio when the market rebounds. We always urge caution though, and we believe a dollar-cost average strategy would work best in the current situation.

Remember the Ten Year Rule and keep money you know you will need to access within the next 10 years in fixed-income investments held to maturity. For your equity investments, focus on quality fundamentals—such as cash flow, return on assets, valuation, history of profit retention for funding future growth, and the soundness of capital management for maximizing shareholder earnings and returns.

If you have questions on how to invest through the market’s rough patches, the experts at Henssler Financial will be glad to help: