See you in December

E*TRADE Securities2

09/11/17

Procrastination can feel like an elixir. But it’s rarely the best solution.

The markets seemed to cheer the news that the White House and senior Democratic leadership agreed to a three-month extension of the U.S. debt ceiling. Republican lawmakers soon followed with a new version of the bill that outlined provisions to fund the government through mid-December. The bill that the Senate passed also includes $15.25 billion in assistance for those affected by natural disasters, including Hurricane Harvey.1

However, market observers know that extensions like this often bring only a brief respite from what could come:  

Potential effects of a debt ceiling breach

Saved for another day

Many in the investment community had cast a wary eye toward September 29: the date the U.S. would have hit its debt limit. For investors looking toward the ominous side of the debt ceiling’s significance prior to the deal, S&P Global Ratings put it this way: “Failure to raise the debt limit would likely be more catastrophic to the economy than the 2008 failure of Lehman Brothers and would erase many of the gains of the subsequent recovery.”2 So, no pressure.

With the debt ceiling seemingly an annual challenge for Congress, its potential market significance can be debated. Reportedly, President Trump and Senate Minority Leader Chuck Schumer (D-NY) did just that; having discussed a debt-ceiling repeal to end some of the politicization with process, not to mention the ensuing market angst.3  

This year, U.S. equities rose following news of the can kicked down the road, in stark contrast to the previous day’s trading session. Some market observers attributed the market’s worst performance since mid-August to the latest nuclear test from North Korea, oncoming Hurricane Irma, and perhaps the realization that Washington’s on the clock with a number of legislative items.4 For bondholders, 10-year Treasury yields jumped and shorter-term bills were mixed after news of the deal broke. Notably, December yields climbed, perhaps signaling that investors believe there’s more debt-ceiling drama to come as the new December deadline approaches. 

On the docket

In addition to the debt ceiling, there’s also the budget to consider. Congress isn’t required to pass a budget, but some experts believe Republicans could use the budget as a way to advance their much-discussed tax reform, which will surely have Wall Street’s attention.

Investors may also want to see how Washington approaches the National Flood Insurance Program, which expires on September 30, and which could approach its $30 billion borrowing limit from the Treasury in light of Hurricanes Harvey and Irma. Continuing uncertainty about the extent of the damage, as well as assistance from Washington, could weigh on banks and insurers.

It’s tempting to procrastinate over unpleasant tasks—Washington knows how to do it with the best of them. For investors, the rewards of staying on top of their portfolios and making sure they’re aligned with their current risk tolerance and goals, typically outweigh the risks of saving that task for another day, especially when market volatility creeps up.

 

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1. Becker, Amanda. “Senate passes disaster aid, government funding, higher debt ceiling,” Reuters, 7 Sep. 2017. https://www.reuters.com/article/us-usa-congress-vote/senate-passes-disaster-aid-government-funding-higher-debt-ceiling-idUSKCN1BI2OB

2. Cox, Jeff. “Failure to raise debt ceiling could be ‘more catastrophic’ than the Lehman collapse, S&P says,” CNBC, 30 Aug. 2017. https://www.cnbc.com/2017/08/30/debt-ceiling-would-be-more-catastrophic-than-lehman-s-and-p-says.html

3. Paletta, Damian and Parker, Ashley. “Trump, Schumer agree to pursue plan to repeal the debt ceiling,” The Washington Post, 7 Sep. 2017. https://www.washingtonpost.com/news/wonk/wp/2017/09/07/trump-schumer-agree-to-pursue-plan-to-repeal-the-debt-ceiling/?hpid=hp_hp-top-table-main_wb-trumpschumer-1235p%3Ahomepage%2Fstory&utm_term=.ff1e7468a7c1

4. Imbert, Fred. “Dow closes more than 200 points lower, posts its worst day since August 17,” CNBC, 5 Sep. 2017. https://www.cnbc.com/2017/09/05/us-stocks-north-korea-economy.html