Debt Ceiling War Heats UP, US Debt Downgrade Coming Like 2011? by IFM’s CIO, James R. Wigen, CAM® ChFM® CPM® CWM®, Sr. Portfolio Manager & Sr. Wealth Manager
This past Wednesday, the House passed a Debt Ceiling Bill that would raise the Debt Ceiling while cutting Trillions of dollars in Government Spending.
The House voted 217 to 215 to pass the Limit, Save, Grow Act of 2023, with all but Four Republican members voting in favor. No Democrats supported its passage.
The measure would lift the Debt Ceiling by $1.5 Trillion or until the end of March 2024, whichever comes first, and Cut Spending to the tune of $4.5 Trillion.
Those cuts mean it’s dead on arrival in the Democratic-controlled Senate, and President Biden has already vowed to Veto it.
Are we headed towards a repeat of the Summer and Fall of 2011?
How did the Stock Market handle the Debt Ceiling negotiations and eventual US Debt Downgrade in 2011?
Leading up to the eventual US Debt Credit Downgrade, the Stock Market held up fairly well, until the eventual Downgrade of the US Debt Credit Rating in August 2011.
Going back and looking at the performance of the Dow Jones Industrial Average, S & P 500 Index & NASDAQ, two weeks before August 2011, until the end of August 2011, here are the results:
DJIA = -15%
S & P 500 Index = -17%
NASDAQ = -18%
At this point, IFM is not predicting we will go through this type of decline anytime soon, however, as a Portfolio Manager IFM must keep this result in mind when managing Client Portfolios.
Brokerage Money Market Funds are Yielding around 4.5% right now, and this Yield will rise if the Fed Raises Rates again this Wednesday, which IFM predicts they will. Therefore, there is no need to be fully invested in Equities right now.
Most investors can trim their Equity exposure as we get closer to more heated debates over the Debt Ceiling, and with the Fall coming in a few months, we may see the Stock Market decline similar to October 2007.
Most investors watched the Stock Market rise throughout 2007, and never analyzed the Economic Data which showed weakness in several key areas.
Before the peak of the Stock Market in October 2007, the Fed Cut the Fed Funds Rate, and few people took notice because they were focused on the Stock Market rising week after week & month after month throughout the Winter, Spring & Summer of 2007.
The Fed Cut the Federal Funds Rate after they continued to see cracks in our Economic Foundation in early Fall of 2007, the Stock Market hit an all-time high in October 2007, and by December 2007 Economists were indicating we were in a Recession!
When looking back on how the Stock Market performed throughout 2007, IFM sees very similar problems forming right now. We should not see the declines we experienced in 2007 to 2012, as that period of time was very unusual.
At this point, there is not significant data to show that type of decline may happen again, however, we currently have a few events we are dealing with that could bring the Stock Market decline around 10%.
If the Stock Market declines around 10%, Diversification in Equities will not help you that much, a reduction of Equity Exposure will have helped you the most, while earning 4.5%+ to sit on the sidelines.
If you need Portfolio Advice or Portfolio Management help, please email IFM’s CIO / Sr. Portfolio Manager, James R. Wigen at J.Wigen@IFManagers.com.
Good Luck Investing!
James CAM® ChFM® CPM® CWM® designations are issued through Global Academy of Finance and Management or GAFM®.
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All opinions expressed by James R. Wigen on this website are solely his opinions and do not reflect the opinions of IFP Advisors, LLC, dba Independent Financial Partners, (IFP). Investment Advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Adviser. IFP and Independent Financial Management, LLC (IFM), are separate entities.