June 06, 2023

3 Lessons from the Debt Ceiling Crisis

The country breathed a collective sigh of relief as Congress recently passed the highly anticipated debt ceiling agreement. Head of Investment Research Jared Kizer shares three evergreen investment lessons we can learn from the averted debt ceiling crisis.


Jared Kizer: All right. So, I wanted to jump on today and do a debrief from the debt ceiling. Now that we've seen the debt ceiling passed, it's been raised, the U.S. government is going to be able to issue debt, it’s going to be able to pay the debt that it already had outstanding. So, the big dynamics leading into that story, of course, are all passed, and everybody will move on to whatever the next thing is. But I think there are some lessons that we can learn that are kind of evergreen lessons from an investment implementation and thinking about investing point of view. So, I wanted to go through those today.

Lesson #1: Media Coverage vs. the Market’s Actual Reactions

Jared Kizer: So probably the single biggest thing that stood out to me and of course we knew we needed to be responsive as the debt ceiling reporting was ongoing and leading up to the last minute. But probably the biggest single thing to me is the big, big divergence around the amount of media attention that this received from the investing point of view compared to what the market reaction actually was in basically all points in time, no matter where you looked in time. So, I think this is a great example of a situation where if you looked at what the market was saying, there really wasn't that much to be worried about. Equity markets basically didn't move. Volatility was relatively low. Really, the only thing that you could point to was short-term interest rates on really, really short-maturity treasury bills increase. But other than that, you wouldn't have known that anything was going on looking into markets, and that's typically the first place that we look to see is there something to be concerned about here? So, I think this is a great lesson. While it's not true for the entirety of the media landscape, this was certainly a case where the market reaction compared to the amount of panic potentially being generated by a lot of the media reporting was just a gigantic gulf and investors in general would have been better served by basically ignoring most of the reporting related to investing and saying, hey, not much going on in the markets so let's kind of move on and not think a lot about this. So, I think that's the first important lesson that I would take away kind of looking back at the debt ceiling.

Lesson #2: Consider Risk in Advance of a Potential Crisis

Jared Kizer: Lesson number two, which is something that we always emphasize, is that you want to think about risk in advance of any events happening, whether it's the debt ceiling or the banking crisis or who knows what the next thing will be out there in markets. The good news is that for basically most allocations that folks implement, there is a lot of history to be able to look at in terms of how those allocations have done over time from a downside risk point of view. And if you think deeply about that in advance and think about that in setting your allocation, that can greatly reduce the need to worry about whatever the particular events of that week, month or year are at because there's a good chance you kind of thought about those things in advance from a bigger picture point of view.

Lesson #3: Concern over the Growing Amount of Government Debt

Jared Kizer: And then last thing I’d share, that's the most specific point, point number three, related to the debt itself is that I do think a reasonable long-term concern for everybody that's out there investing is the sheer amount of debt that global governments, the U.S. included, are accumulating. We saw a deal, but really, if you look at the long-term trajectory under any reasonable set of assumptions, we're only going to see U.S. government debt increase from already very, very high levels. No real end in sight for a deficit perspective. So I think if you want to step back and say, well, what's the most relevant thing to take away from this specific event, I think that's it is that we should all be concerned over the long term with the amount of debt that's being accumulated. So hopefully helpful kind of retrospective now that we're a little bit past the debt ceiling. If you have additional questions you'd like for us to tackle, feel free to reach out to your advisor and suggest those or click the link below and submit questions that way. Thanks.

If you have any questions please feel free to drop us a note: buckinghamstrategicwealth.com/contact-us

About the Author

Jared Kizer

Head of Investment Research

Jared Kizer is the Head of Investment Research for Buckingham Wealth Partners. In 2008, Jared co-authored the book "The Only Guide to Alternative Investments You’ll Ever Need" with financial author Larry Swedroe. Jared has written several articles on such topics as retirement planning and investment policy. His work has been published in The Journal of Portfolio Management, Journal of Indexes and indexuniverse.com. Jared has made appearances on local and national television, including Bloomberg Television.

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