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The debt ceiling deadline just shifted forward to early June, but does it matter for investors?
First, let me say this – the news is going to ratchet up the fear meter around this issue in order to drive eyeballs. Please be sure that you do not fall victim to the news cycle panic, which only benefits them and their advertising revenue.
With that said, here is the latest.
As you probably know, Treasury Secretary Yellen informed Congress that the Treasury will essentially exhaust all available funds under the debt limit as early as June 1st but also left open the possibility that it could be a few weeks after that.
Up until this point, most people thought the Treasury would be able to pay obligations up until the latter part of July under the current debt limit. Now it looks like the cash balance of the US Treasury will dip down into the $25 billion range sometime in early June…which is basically the bare minimum of cash they can have on hand before they can no longer pay obligations.
One of the things ratcheting up the fear meter is the fact that there is very little time left to negotiate a deal since the House and the Senate will only be in session at the same time for two weeks before we hit early June.
The House is scheduled to be in recess this week, and then they will be in recess again starting May 26th. The Senate will be in recess the week of May 22nd and will come back on May 29th.
So that’s why there are only two weeks left when both the House and the Senate are in session TOGETHER before the early June deadline.
Here’s What we Think About the June Debt Ceiling Deadline
This just raises the odds that there will be a temporary extension. I just cannot imagine leaders, no matter how reckless they may be, letting the country default without agreeing to a temporary extension.
So, are we looking at a full-blown default? Possible – Yes. Probable – No.
Will there be a month or so of unpredictability and market volatility? Possible – Yes. Probable – Yes.
So What Does This Mean for You, the Investor?
I am far from an expert on this issue, which may actually add to the credibility of my opinion because it just seems like basic common sense is the most likely outcome.
Read that again.
Now, because legislators are operating on a late July deadline (that has now been moved forward to June 1st) it’s very unlikely that any serious negotiations on spending changes or other policies have even started.
There is no way that the Republicans can think a deal can be reached before June 1st, so because they have the majority in the House, I just think that makes a “clean short-term extension” the most likely scenario.
While the Democrats would prefer a longer-term extension, say out to 2025 or 2026, they will have no choice but to go along with any clean extension offered by the Republicans, even if it is just before the June 1st deadline.
One scenario is that a short-term deal would end up with a new deadline of late July since that was what everyone was expecting anyway, and it is right before the conventional long summer recess.
Another scenario is a short-term deal extension out towards the end of September which would coincide with the end of fiscal year 2023. Remember, the end of a fiscal year is going to bring about the specter of a government shutdown once again, so it makes sense that this could also be a logical extension deadline. While FY 2024 spending and the debt limit are unrelated, maybe they end up tackling both issues at the same time.
I’m betting on the second scenario, but that doesn’t really change the advice below.
So, What Can You Do?
If you are a long-time reader of my blog or any of the thoughts coming out of Monument Wealth Management, you already know what I’m going to say.
Hopefully, you still have some cash reserves to live out of so that you do not have to sell any of your securities portfolios during any short-term upcoming volatility in the market.
If you don’t have enough (any) cash raised, I honestly don’t think it’s THAT BAD of a time to raise a little cash.
Yes, the market (I’m referring to the S&P 500 here) is still around -15% off its all-time high set back in January of 2022, but it is far from its low point back in October of down -25%.
Is it the optimal time to raise cash? No.
Is it a good time to raise cash? For those of you who do not have enough cash to weather any short-term volatility, the answer is definitely yes.
(By the way, the optimal time to have raised cash was January 2022.)
Look at it This Way
When you are on a road trip, and you see gas prices way below anything you are normally used to paying, you top off your tank no matter how much gas you have. That’s just common sense.
When your tank is on empty, you choose the gas station with the best price and take your lumps. That’s just reality.
What you never want to do is end up on the side of the highway paying for a tow truck because you ran out of gas.
Be financially unbreakable – it allows you to weather the news and the associated market volatility. I can’t remember any point in my career where there has been zero probability of bad news materializing.
The possibility of bad things happening is always present. Therefore, planning around that is the best hedge against volatility that I know of.
Whatever you do, don’t go out and make foolish decisions about your investments just because the news is ratcheting up the fear.
Giving people unfiltered opinions and straightforward advice is our value proposition. Reach out if you need any help or guidance, and as always…
Keep looking forward,
Related: Why Risk Makes You Wealthy